Park Corporation is planning to issue bonds with a face valu

Park Corporation is planning to issue bonds with a face value of $2,011,000 and a coupon rate of 10 percent. The bonds mature in 5 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 does not use a premium account. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1, FVA of S1, and PVA of S1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) 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 journal

Solution

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   = $20,11,000 Million Annual Coupon % 10.00% Annual Coupon Amount $2,01,100.00 Million Semi Annual Coupon Amount $1,00,550.00 Million Step 2: Calculate number of years to Maturity Number of years to maturity = 5 years Interest is paid semi annyally so total period = 5 Years * 2 = 10 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 $1,00,550.00                     0.9592 $96,450.84 2 Interest $1,00,550.00                     0.9201 $92,518.79 3 Interest $1,00,550.00                     0.8826 $88,747.04 4 Interest $1,00,550.00                     0.8466 $85,129.06 5 Interest $1,00,550.00                     0.8121 $81,658.57 6 Interest $1,00,550.00                     0.7790 $78,329.56 7 Interest $1,00,550.00                     0.7473 $75,136.27 8 Interest $1,00,550.00                     0.7168 $72,073.16 9 Interest $1,00,550.00                     0.6876 $69,134.93 10 Interest $1,00,550.00                     0.6595 $66,316.48 10 Bond Principal Value $20,11,000.00                     0.6595 $13,26,329.51 Total $21,31,824.20 Current Bonds Price = $21,31,824.20 Issue price of the bond= $21,31,824.20 Par Value of the bonds = $20,11,000.00 Discount to be amortized = $1,20,824.20 ANSWER =1) Journal Entries Date Account Title and explanation Debit Credit January, 01 Cash $                     21,31,824       To 10% Bonds $          20,11,000        To premium on bonds payable $             1,20,824 Working Notes: for calculation of the interest expenses Interest Expenses of June on par = $1,00,550 Add: Amortization interest = -$9,947 Total interest = $90,603 Journal Entries Date Account Title and explanation Debit Credit June , 30 Interest Expenses $                           90,603 Amortization of Premium $                             9,947       To Cash $             1,00,550 (To Record the interest payment of june 30) Answer = 3) BALANCE SHEET (PARTIAL ) (As on June 30th ) Long Term Liabilities: Bonds Payable $                 20,11,000.0 Balance in bonds Premium $                       1,10,877 Net Balance - Bonds Payable $                     21,21,877 Working notes EFFECTIVE - INTEREST AMORTIZATION SCHEDULE MARKET RATE OF INTEREST IS 6% AND BOND INTEREST IS 7% Date Interest payment on face value Interest Expenses (Cash paid - Decrease in Carrying value) Amortization expenses Credit Balance in bond discount Credit Balance in acct payable book Value of the bond 1/1 $                                                                             -   $                                    -   $                          -   $         1,20,824 $       20,11,000 $       21,31,824 1 06/30 $                                                                1,00,550 $                           90,603 $                   9,947 $         1,10,877 $       20,11,000 $       21,21,877 2 12/31 $                                                                1,00,550 $                           90,180 $                10,370 $         1,00,506 $       20,11,000 $       21,11,506 3 06/30 $                                                                1,00,550 $                           89,739 $                10,811 $             89,696 $       20,11,000 $       21,00,696 4 12/31 $                                                                1,00,550 $                           89,280 $                11,270 $             78,425 $       20,11,000 $       20,89,425 5 06/30 $                                                                1,00,550 $                           88,801 $                11,749 $             66,676 $       20,11,000 $       20,77,676 6 12/31 $                                                                1,00,550 $                           88,301 $                12,249 $             54,427 $       20,11,000 $       20,65,427 7 06/30 $                                                                1,00,550 $                           87,781 $                12,769 $             41,658 $       20,11,000 $       20,52,658 8 12/31 $                                                                1,00,550 $                           87,238 $                13,312 $             28,345 $       20,11,000 $       20,39,345 9 06/30 $                                                                1,00,550 $                           86,672 $                13,878 $             14,468 $       20,11,000 $       20,25,468 10 12/31 $                                                                1,00,550 $                           86,082 $                14,468 $                       0 $       20,11,000 $       20,11,000