Question

Park Corporation is planning to issue bonds with a face value of $790,000 and a coupon rate of 7.5 percent. The bonds mature in 6 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 discount account. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1, FVA 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 is required for a transaction/event, select "No journal entry required" in the first account field.)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 entry required" in the first account field.)3. What bond payable amount will Park report on its June 30 balance sheet? (Enter all amounts with a positive sign.)

Answer 1

Journal Entry to record issuance of bond:-

First of all, we need to calculate the issue price of the bonds.

Semi Annual Stated Coupon Interest = face Value 790,000 x Coupon Rate 7.5% * 1/2half yearly = $29,625

Semiannual period to maturity (n) = 6 years x 2 = 12

Semi Annual Market Interest Rate (R) = 8.5%*1/2 = 4.25%

Present Value of Bonds (Price of the bonds issued) = Semi-Annual Coupon Interest x PVIFA (R, n) + Face Value x PVIF (R, n)

= (29,625*9.25039) + (790,000*0.60686)

= 274,042.80 + 479,419.40

= $753,462

Calculation of Present Value Factor:-

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)n) / R

PVIFA (4.25%, 12) = (1 – 1/(1+0.0425)12) / 0.0425 = 9.25039

PVIF (R, n) = Present Value interest factor for ‘n’ period at ‘R’% = 1/(1+R)n

PVIF (4.25%, 12) = 1/(1+0.0425)12= 0.60686

Step-by-step explanation: