Question

Venzuela Co. is building a new hockey arena at a cost of $2,500,000. It received a downpayment of $500,000 from local businesses to support the project, and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Instructions:

(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2016.

(b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effectiveinterest method.

(c) Assume that on July 1, 2019, Venzuela Co. retires half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this retirement.

Answer 1

Present value of the principal
$2,000,000 X .38554 (PV10, 10%) = $ 771,080
Present value of the interest payments
$210,000* X 6.14457 (PVOA10, 10%) = 1,290,360
Present value (selling price of the bonds) =$ 771,080+1,290,360= $2,061,440
*$2,000,000 X 10.5% = $210,000
1 Jan 2009 Cash Dr 2,011,440
Unamortized Bond Issue Costs Dr 50,000
Bonds Payable Cr 2,000,000
Premium Bonds Payable Cr 61,440
2.
Date	Cash paid	Int exp	Prem Amort	Carrying amount of bond
01-01-09				2061440
01-01-10	210000	2E+05	3856	2057584
01-01-11	210000	2E+05	4242	2053342
01-01-12	210000	2E+05	4666	2048676
01-01-13	210000	2E+05	5132	2043544
3. Carrying amount as of 1/1/12 $2,048,676
Less: Amortization of bond premium (5,132/2)= 2,566
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Carrying amount as of 7/1/12 = $2,046,110
Reacquisition price = $1,065,000
Carrying amount as of 7/1/12 ($2,046,110/2) = (1,023,055)
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$41,945
Unamortized bond issue costs ($32,500/2) = 16,250
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Loss = $ 58,195
Entry for accrued interest :
1 Jul 12 Interest Expense Dr 51,217
Premium on Bonds Payable
($5,132*1/2 *1/2) Dr 1,283
Cash
($210,000*1/2*1/2) Cr 52,500
Entry for reacquisition :
1 Jul 12 Bonds Payable Dr 1,000,000
Premium on Bonds Payable Dr 23,055*
Loss on Redemption of Bonds Dr 58,195
Unamortized Bond Issue Costs Cr 16,250**
Cash Dr 1,065,000
Calculations:
*Premium as of 7/1/12 to be written off
($2,046,110 – $2,000,000) *1/2 = $23,055
**($50,000*1/2)/10 = $2,500 per year
$2,500*3.5 = $8,750
Remaining Balance: $25,000 – $8,750 = $16,250 on 1/2 Bonds
The loss is reported as an ordinary loss.