Question

E10-13 LO10-5 Recording and Reporting a Bond Issued at a Premium (with Premium Account) Park Corporation is planning to issue bonds with a face value of $2,000,000 and a coupon rate of 10 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31 All of the bonds were sold on January 1 of this year. Park uses the effective interest amortization method and also uses a premium account. Assume an annual market rate of interest of 8.5 percent. Required: I. Provide the journal entry to record the issuance of the bonds. 2. Provide the journal entry to record the interest payment on June 30 of this year. 3. What bonds payable amount will Park report on its June 30 balance sheet?

Answer 1

B Cash flows A 1 1) 2 Particulars 3 Principal 4. Interest 5 Issue price PV Factor at 4.25% PV of cash flows ($) 2000000 0.43499 869980 100000 13.29437 1329437 2199417 6 Date 3 Debit ($) Credit ($) 2199417 Particulars 01-Jan Cash Premium on bonds payable Bonds payable |(To record the issue of bonds.) 199417 2000000 10 11 12 13 2) 14 Date Credit ($) 15 93475 16 Particulars Dbeit ($) 30-Jun Interest expense (2199417*0.0425 Premium on bonds payable Cash (2,000,000*0.10*1/2) (To record the interest payment.) 6525 17 100000 18

21 Balance sheet 22 Long-term lianilities: Bonds payable 23 Amount ($) 2199417 -6525 2192892 24 Less: premium on bonds payable Total 25