Question

Park Corporation is planning to issue bonds with a face value of $2,000,000 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

Answer 1

Answer:

Cash                      2,214,007 debit

        bonds payable              2,000,000 credit

        premium on B.P                 214,007 credit

Explanation:

To know the proceeds for the bonds we will calculate the present value of the coupon payment and the present vlaue of the maturity at market rate:

The coupon payment will be an ordnary annuity

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

Coupon payment: 2,000,000 x 0.05 =  100,000

time: 10 years x 2 payment per year = 20

rate 8.5% annual rate: 0.085/2 = 0.0425 semiannual rate

$100000 \times \frac{1-(1+0.0425)^{-20} }{0.0425} = PV$

PV $1,329,436.5808

Whilethe maturity the present value of a lump sum

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  2,000,000.00

time   10 years to maturity

 rate  0.085

$\frac{2000000}{(1 + 0.085)^{10} } = PV$  

PV   884,570.83

PV coupon payment $1,329,436.5808

PV maturity                   $884,570.8301

Total $2,214,007.4109

facevalue  2,000,000

premium        214,007