2. Prepare the journal entry to record the interest payment on June 30 of this y

Question

2. Prepare the journal entry to record the interest payment on June 30 of this year. (If no entry is required for a transactionlevent, select "No journal entry required" in the first account field.) Park Corporation is planning to issue bonds with a face value of S760,000 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 eftective-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 S1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) View transaction list Required: 1. Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, slect "No journal entry required" in the first account field.) Journal entry worksheet View transaction list Record the interest payment on June 30 using effective-interest amortization. Journal entry worksheet Note: Enter debits before credits Record the issuance of bonds. Date General Journal Debit Credit June 30 Note: Enter debits before credits. Date General Journal Debit Credit January 01 3. What bond payable amount will Park report on its June 30 balance sheet? a positive sign.) PARK CORPORATION Balance Sheet (Partial) At June 30 Record entry Clear entry View general journal Long-term liabilities

Explanation / Answer

Solution:

First of all we need to calculate the the Issue price of the bonds

Face Value of the bond = $760,000

Coupon Rate = 7.5% annual

Semi Annual Interest Payment = Face Value 760,000 x Coupon Rate 7.5% x ½ = $28,500

Market Interest Rate (R ) = 8.5% annually or 4.25% half yearly

Semi annual maturity period (n) = 6*2 = 12

Market Rate of Interest is the available rate of return on the security if a buyer buys and holds security till the maturity, he will get yield 4.25% half yearly.

So, the present value of bonds is depends upon the yield i.e. Market Interest Rate or available rate of return.

Present Value of the bonds in dollars = (Semi Annual Stated Interest x Present value of ordinary annuity at 4.25% for 12 periods) + (Par Value x Present Value factor of 1 for 12 periods at 4.25%)

= (28,500*9.250) + (760,000*0.607)

= 263,625 + 461,320

= $724,945

Present value of ordinary annuity at 4.25% for 12 periods = (1 – 1/(1+R)n)/R = (1 – 1/(1+0.0425)12) / 0.0425 = 9.250

Present Value factor of 1 for 12 periods at 4.25%) = (1+0.0425)12= 0.607

Issue Price of the bonds = $724,945

Note – I have used present value factor for 3 decimal places…In case difference in answer, please check the table provided in the question and put the value, you will get correct answer.

Journal Entry to record the issuance of the bonds

Date

Account Titles and Explanation

Debit

Credit

Jan.1

Cash

$724,945

Discount on Bonds Payable

$35,055

Bonds Payable

$760,000

(Bonds are issued at discount)

Journal Entry to record Interest Payment on June 30

Interest Expenses using effective interest rate = (Book Value of Bonds Payable x Effective Interest Rate)

= 724,945*4.25%

= $30,810

Discount Amortized on June 30 = Interest Expense - Cash Interest Payment = 30,810 – 28,500 = 2,310

Date

Account Titles and Explanation

Debit

Credit

June.30

Interest Expense

$30,810

   Discount on Bonds Payable

$2,310

   Cash Interest Payable

$28,500

Bonds Payable Amount on June 30 in Balance Sheet

Balance Sheet (Partial)

At June 30

Long Term Liabilities:

Bonds Payable

$760,000

Less: Unamortized Discount on Bonds Payable (35,055 - 2310)

-$32,745

Carrying Value of the Bonds Payable

$727,255

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Date

Account Titles and Explanation

Debit

Credit

Jan.1

Cash

$724,945

Discount on Bonds Payable

$35,055

Bonds Payable

$760,000

(Bonds are issued at discount)

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