E10-13 Recording and Reporting a Bond Issued at a Premium (with Premium Account)
ID: 2526473 • Letter: E
Question
E10-13 Recording and Reporting a Bond Issued at a Premium (with Premium Account) LO10-5 Park Corporation is planning to issue bonds with a face value of $3,500,000 and a coupon rate of 10 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 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.) 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.) View transaction list Journal entry worksheet Record the issuances of the bonds. Note: Enter debits before credits. Date General Journal Debit Credit January 01 Record entry Clear entry View general journalExplanation / Answer
CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $35,00,000 Million Annual Coupon % 10.00% Annual Coupon Amount $3,50,000.00 Million Semi Annual Coupon Amount $1,75,000.00 Million Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 8.5% Bonds interest is paid semi annualy means so discounting factor = 8.5 % /2= 4.25 % PVF = 1 / Discount rate = 1/ 1.0425 Result of above will again divide by 1.0425 , repeat this lat period Period Interest Amount (In Million) PVF @ 4.25% PresentValue 1 Interest $1,75,000.00 0.9592 $1,67,865.71 2 Interest $1,75,000.00 0.9201 $1,61,022.26 3 Interest $1,75,000.00 0.8826 $1,54,457.80 4 Interest $1,75,000.00 0.8466 $1,48,160.96 5 Interest $1,75,000.00 0.8121 $1,42,120.83 6 Interest $1,75,000.00 0.7790 $1,36,326.93 7 Interest $1,75,000.00 0.7473 $1,30,769.24 8 Interest $1,75,000.00 0.7168 $1,25,438.12 9 Interest $1,75,000.00 0.6876 $1,20,324.34 10 Interest $1,75,000.00 0.6595 $1,15,419.03 11 Interest $1,75,000.00 0.6326 $1,10,713.70 12 Interest $1,75,000.00 0.6069 $1,06,200.19 13 Interest $1,75,000.00 0.5821 $1,01,870.68 14 Interest $1,75,000.00 0.5584 $97,717.68 15 Interest $1,75,000.00 0.5356 $93,733.99 16 Interest $1,75,000.00 0.5138 $89,912.70 17 Interest $1,75,000.00 0.4928 $86,247.19 18 Interest $1,75,000.00 0.4727 $82,731.12 19 Interest $1,75,000.00 0.4535 $79,358.39 20 Interest $1,75,000.00 0.4350 $76,123.15 21 Bond Principal Value $35,00,000.00 0.4350 $15,22,463.09 Total $38,48,977.10 Current Bonds Price = $38,48,977.10 Issue price of the bond= $38,48,977.10 Par Value of the bonds = $35,00,000.00 Discount to be amortized = $3,48,977.10 ANSWER =1) Journal Entries Date Account Title and explanation Debit Credit January, 01 Cash $ 38,48,977 To 10% Bonds $ 35,00,000 To premium on bonds payable $ 3,48,977 ANSWER =2) BALANCE SHEET (PARTIAL ) (As on June 30th ) Long Term Liabilities: Bonds Payable $ 38,48,977.1 Less: Amortization of Premium on Bonds $ 11,418.5 Net Balance - Bonds Payable $ 38,37,558.6 Working Notes: for calculation of the interest expenses Interest Expenses of June on par = $1,75,000.00 Add: Amortization interest = $11,418.47 Total interest = $1,63,581.53 Interest Expenses of Dec - 31 on par = $1,75,000.00 Add: Amortization interest = $11,903.76 Total interest = $1,63,096.24 Working notes EFFECTIVE - INTEREST AMORTIZATION SCHEDULE MARKET RATE OF INTEREST IS 8.5% AND BOND INTEREST IS 10% Date Interest payment on face value Interest Expenses (Cash paid - Decrease in Carrying value) Amortization expenses Debit Balance in bond discount Credit Balance in acct payable book Value of the bond 0 01-Jan $0.00 $0.00 $0.00 $3,48,977.10 $35,00,000.00 $38,48,977.10 1 Jun-30 $1,75,000.00 $1,63,581.53 -$11,418.47 $3,37,558.63 $35,00,000.00 $38,37,558.63 2 Dec-31 $1,75,000.00 $1,63,096.24 -$11,903.76 $3,25,654.87 $35,00,000.00 $38,25,654.87
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