Question

Park Corporation is planning to issue bonds with a face value of $750,000 and a coupon rate of 7.5 percent. The bonds mature in 4 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.
Required:
1. Provide the journal entry to record the issuance of the bonds.
2. Provide the journal entry to record the interest payment on June 30 and December 31 of this year.
3. What bonds payable amount will Claire report on this year's December 31 balance sheet?

Answer 1

Answer:

Bond issuance

Dr Cash                                           $725,010.82  

Dr Discount on bonds payable     $ 24,989.18  

Cr bonds payable                                                $750,000

30 June :

Dr interest expense   30,812.96  

Cr cash                                            28,125.00  

Dr bonds discount                           2,687.96  

December 31:

Dr interest expense    30,927.20  

Cr cash                                            28,125.00  

Dr bonds discount                            2,802.20  

Bonds payable at 31st Dec: $ 730,500.98  

Explanation:

The price on the bonds issue is computed using pv formula in excel as shown below:

=-pv(rate,nper,pmt,fv)

rate is the semiannual market interest of 4.25% i.e 8.5%*6/12

nper is the number of semiannual coupon payments of the bond which is 4 years multiplied by 2=8

pmt is the semiannual coupon payment=$750,000*7.5%*6/12=$ 28,125.00  

fv is the face value of $750,000

=-pv(4.25%,8,28125,750000)=$725,010.82  

find attached amortization schedule

discount on bonds payable=$750,000-$725,010.82=$24,989.18