Question

Park Corporation is planning to issue bonds with a face value of $2,001,000 and a coupon rate of 10 percent. The bonds mature in 15 years and pay interest semiannually every June 30 and December 31. All of the Donds were sold onJnuary 1 of this year. Park uses the effective-interest amortization method and does not use a premium aCcount. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1. EVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) Required: 1. Prepare the journal entry to record the issuance of the bonds. (If no entry required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet 1 Record the issuances of the bonds. Note: Enter debits before credits. Credit Date General Journal Debit January 01 Clear entry Record entry View general journal 2. Prepare the journal entry to record the interest payment on June 30 of this year. (If no entry is required for a transaction/event, select "No journal emtry required" in the first account field.) View transaction list Journal entry worksheet Record the interest payment on June 30, using effective-interest amortization. Note: Enter debits before credits. Credit Date General Journal Debit June 30 View general journal Record entry Clear entry 3. What bonds payable amount will Park report on its June 30 balance sheet? PARK CORPORATION Balance Sheet (Partial) At June 30 Long-term liabilitiesa

Answer 1

Price of the Bond is the Present value of discounted Future cashflows from the Bond over its life. Cash flows will be at Requied Rate of Return Future cash flows will be of Coupon Payments and Maturity Cashflows Coupon Payments is = Par value * Coupon Rate Coupon Payments is = (2001000*10%*0.50) Coupon Payments is = 5 100,050/. Maturity Proceeds is = $ 200,1000/. No of semi annuals to maturity is = (102) = 20 Market interest rate for semi annual is = 8.5%/2 -4.25% Current market price of these bond = ? Computation Present value of cashflows :- Semi Cash PVF Discounted Annual flows $ @4.25% Cashflows $ 100,050 0.9592 95,971 100,050 0.9201 92,059 100,050 0.8826 88,306 100,050 0.8466 84,706 100,050 0.8121 81,253 100,050 0.7790 77,940 100,050 0.7473 74,763 100,050 0.7168 71,715 100,050 0.6876 68,791 100,050 0.6595 65,987 100,050 0.6326 63,297 100,050 0.6069 60,716 100,050 0.5821 58,241 100,050 0.5584 55,867 100,050 0.5356 53,589 100,050 0.5138 51,404 100,050 0.4928 49,309 100,050 0.4727 47,299 100,050 0.4535 45,370 100,050 0.4350 43,521 20 2,001,000 0.4350 870,414 Price of the bond 2,200,515 Issue price of the bond is $ 2,200,515/.

Credits Debit $ 2,200,515 Journal entries :- Date Accounts Title & Explanation 01-Jan Cash To Bonds Payable To Premium on bonds payable (Entry for issue of bonds payable at premium) 2,001,000 199,515 30-Jun 93,522 6,528 Interest expense (2200515*8.5%*(6/12) Premium on bonds payable To Cash (2001000*10%*(6/12)) (Entry for Interest Payment on 30th June) 100,050 Amount of Bonds Payable in June 30 balance sheet :- Liabilities and shareholders equity Amounts Liabilities: Long term liabilities 2,001,000 Add: Premium on bonds payable (199515-6528) 192,987 Total Long term liabilities 2,193,987