Question

Park Corporation is planning to issue bonds with a face value of $3,100,000 and a coupon rate of 7 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 6.0 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

1. Prepare the journal entry to record the issuance of the bonds.
2. Prepare the journal entry to record the interest payment on June 30 of this year. What bonds payable amount will Park report on its June 30 balance sheet?.

Answer 1

PV of bonds:

PV of face value = $3,100,000 / (1 + 3%)²⁰ = $1,716,395

PV of coupon payments = $108,500 x 14.877 (PVIFA, 3%, 20 periods) = $1,614,155

market price = $3,330,550

1) January 1, year 1

Dr Cash 3,330,550

Cr Bonds payable 3,000,000

Cr Premium on bonds payable 330,550

2) June 30, year 1

Dr Interest expense 99,916

Dr Premium on bonds payable 8,584

Cr Cash 108,500

amortization of bond premium = ($3,330,550 x 6%) - $108,500 = -$8,584