Question

P14.2 (LO 1, 2) Excel (Issuance and Redemption of Bonds) Venezuela 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, 2019, 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 on January 1, 2019.

Answer 1

a.Present Value of the principal = $2,000,000 × 0.38554 = $771,080

Present Value of Interest = $2,000,000 × 10.5% =$210,000

$210,000 × 6.14457 = $1,290,359

Present selling value of bonds = $771,080 + $1,290,359 = $2,061,439

Journal Entry

January 1,2019

Cash Dr. $2,061,439

To 10.5% Bonds Payable $2,000,000

To Premium on Bonds Payable $61,439

b.Bond Amortization Schedule

Date Cash Interest Interest Decrease Carrying

Expense in Carrying amount of

(b= d×10%) amount note

(c = b-a) (d = d+c)

1/01/2019 $2,061,439

31/12/2019 $210,000 $206,144 ($3,856) $2,057,583

31/12/2020 $210,000 $205,758 ($4,242) $2,053,341

31/12/2021 $210,000 $205,334 ($4,666) $2,048,675

31/12/2022 $210,000 $204,868 ($5,132) $2,043,543

31/12/2023 $210,000 $204,354 ($5,646) $2,037,897

31/12/2024 $210,000 $203,790 ($6,210) $2,031,687

31/12/2025 $210,000 $203,169 ($6,831) $2,024,856

31/12/2026 $210,000 $202,486 ($7,514) $2,017,342

31/12/2027 $210,000 $201,734 ($8,266) $2,009,076

31/12/2028 $210,000 $200,908 ($9,092) $1,999,984

c.Journal Entry

July 1,2022

10.5% Bonds Payable Dr. $1,000,000

Premium on Bonds Payable Dr. $23,059

Loss on redemption of Bonds Dr. $41,941

To Cash $1,065,000