Question

Issuance and Redemption of Bonds
356 Co. is building a new classroom arena (with heating and AIR). Information concerning the arena follows.
	Cost of arena							$ 2,500,000
	Down payment received from local businesses to support the project							500,000
	Borrowing needed to complete the project							2,000,000
	Issuance of bonds on January 1, 2016							2,000,000
		Interest is paid annually on January 2.
	Stated interest rate on bonds							10.50%
	Term of bonds in years							10
	Yield on bonds							10.00%

Instructions:
(a)	Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2016.
	Present value of the bonds using Excel PV function:

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

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

-entry to pay accrued interest

-entry for redemption

Answer 1

ANSWER

Table values are based on:
n=	10
i=	10.5%
Cash Flow	Amount	Present Value
Interest	$2,000,000*10.5% =$210,000	$210,000*PVAF(10%,10) =$210,000*6.14457 =$1,290,358
Principal	$2,000,000	$2,000,000*PVIF(10%,10) =$2,000,000*0.38554 =$771,080
Price of Bonds		$2,061,438
Premium on bonds =$2,061,438 - $2,000,000 =$61,438
Amortization table
Date	Interest Payment	Interest expenses	Premium amortization	Bond carrying amount
01-Jan-16				20,61,438
01-Jan-17	2,10,000	2,06,144	3,856	20,57,582
01-Jan-18	2,10,000	2,05,758	4,242	20,53,340
01-Jan-19	2,10,000	2,05,334	4,666	20,48,674
01-Jan-20	2,10,000	2,04,867	5,133	20,43,541
01-Jan-21	2,10,000	2,04,354	5,646	20,37,896
01-Jan-22	2,10,000	2,03,790	6,210	20,31,685
01-Jan-23	2,10,000	2,03,169	6,831	20,24,854
01-Jan-24	2,10,000	2,02,485	7,515	20,17,339
01-Jan-25	2,10,000	2,01,734	8,266	20,09,073
01-Jan-26	2,10,000	2,00,907	9,073	20,00,000

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