Question

Park Corporation is planning to issue bonds with a face value of $2,700,000 and a coupon rate of 9 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 7.5 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

Required: 1.&2. Prepare the journal entry to record the issuance of the bonds and the interest payment on June 30 of this year 3. How will Park present its bonds on its June 30 balance sheet?

3. How will Park present its bonds on its June 30 balance sheet?

Journal entry worksheet < 1 2 Record the issuance of the bonds. Note: Enter debits before credits. General Journal Debit Credit Date January 01 Record entry Clear entry View general journal

Answer 1

Step 1 Calculation of issue price of bond Face Value Stated Rate Coupon Payment Market Rate Maturity Period $27,00,000 9.00% Semiannually 7.50% Step 2: Amortisation Schedule The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised. 10 Amortisation schedule (Effective Interest Method) Coupon payment frequency Coupon Rate consider for calculation Date Opening book Balance Cash Payment Interest Expense 4.50% Amortisation of Bond Premium (D)=(B)-(C) (A) (B) (C)=(A) x 3.75% 1 Closing Book Value (A)+(C)-(B) $28,66,308 $28,52,295 Coupon Payment $1,21,500 ($2700000 x 4.5%] 3.75% Jan 01, Year 1 Jun 30, Year 1 $28,66,308 $1,21,500 $1,07,487 $14,013 Market Rate Consider for Calculation Period 10 Date Ans 1 Jan 01, Year 1 $1,66,308 $27,00,000 Account Title Debit Credit Cash $28,66,308 Premium on Bond Payable Bond Payable (To record issuance of bond at premium) Interest Expense $1,07,487 Premium on Bond Payable $14,013 Cash (To record interest payment and premium amortisation) Present Value of Coupon Payments Present Value of Annuity of $1 8.21279 Present Value of Coupon Payments (A) $9,97,854 ($121500 x 8.21279] Present Value of Maturity Value Present Value of $1 0.69202 Present Value of Maturity Value (B) $18,68,454 [$2700000 x 0.69202] Present Value of Bond = Present Value of Coupon Payment + Present Value of Maturity Present Value of Bond [(A)+(B)] $28,66,308 Ans 2 Jun 30, Year 1 $1,21,500 Ans 3 Park Corporation Balance Sheet (Partial) June 30, Year 1 Bond Payable Add: Discount on bond payable Issue price of the Bond $28,66,308 $27,00,000 $1,52,295 $28,52,295