Question

Park Corporation is planning to issue bonds with a face value of $600,000 and a coupon rate of 7.5 percent. The bonds mature in four 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. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) Required:

Answer 1

Answer and Step by Step Explanation:

A.Price at Issuance (Proceeds) = PV of bond’s cash flows = PV of coupon annuity + PV of payment at maturity (face value)

Coupon Payment = 600,000 x 7.5% / 2 = 22,500

Number of coupon payments = 8 (2 x 4 years)

Market rate of 8.5% => use 4.25% discount rate for semiannual payments

Price at Issuance = 6.6638 x 22,500 + 0.7168 x 600,000 = $580,016 (discount)

B.Journal Entry at Issuance:

DrCash (A) 580,016

Cr Bond Payable (L) 580,016

C.Journal Entry on June 30, :

Dr Interest Expense 24,650 (580,016 x 4.25%)

Cr Bond Payable 2,150 Cash 22,500

D.As of June 30, :

Bond Payable (L) $582,166

PV of $1 annuity for 8 periods at 4.25% is 6.6638.

PV of a single $1 payment in 8 periods at 4.25% is 0.7168