Question

2018. Capulet Corporation does not use reversing entries. P14-2 (L01,2) EXCEL (Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey arena at a cost of 00,000. It received a downpayment of $500,000 from local businesses to support the project, and now needs to borrow $2,000,000 tocomplete 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 on January 1, 2016 (b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method. ume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

a) Present value of the principal

$2,000,000 x 0.38554 (PV 10, 10%) = $771,080

Present value of the interest payments

($2,000,000 x 10.5%) x 6.14457 (PVOA 10, 10%) = $1,290,360

Present value (selling price of the bonds) = $771,080 + $1,290,360 = $2,061,440

S. No	Description	LF	Debit $	Credit $
1	Cash A/c Dr.		2,011,440
	Unamortized Bond Issue Costs A/c Dr.		50,000
	To Bonds Payable A/c			2,000,000
	To Premium Bonds Payable A/c			61,440

b)

Date	Cash Paid	Interest Expense	Premium Amortization	Carrying Amount of Bonds
1/1/2016				$2,061,440
1/1/2017	$210,000	$206,144	$3,856	$2,057,584
1/1/2018	$210,000	$205,758	$4,242	$2,053,342
1/1/2019	$210,000	$205,334	$4,666	$2,048,676
1/1/2020	$210,000	$204,868	$5,132	$2,043,544

c) Carrying amount as of 1/1/19 = $2,048,676

Less:  Amortization of bond premium ($5,132/2) = ($2,566)

Carrying amount as of 7/1/19 = $2,046,110

Reacquisition price = $1,065,000

Carrying amount as of 7/1/19 ($2,046,110/2) = ($1,023,055)

Unamortized bond issue costs ($32,500/2) = $16,250

Loss on redemption of bonds = $1,065,000 - ($1,023,055) + 16,250 = $58,195

Date	Description	LF	Debit $	Credit $
1/1/2019	Entry for accrued interest
	Interest Expense A/c Dr.		51,217
	Premium on Bonds Payable A/c Dr. ($5,132 x 1/2 x 1/2)		1,283
	To Cash A/c ($210,000 x 1/2 x 1/2)			52,500
	Entry for reacquisition
	Bonds Payable A/c Dr.		1,000,000
	Premium on Bonds Payable A/c Dr. ($2,046,110 - $2,000,000) x 1/2		23055*
	Loss on Redemption of Bonds A/c Dr.		58,195
	To Unamortized Bond Issue Costs A/c			16250**
	To Cash A/c			1,065,000

*Premium as of 7/1/14 to be written off

($2,046,110 - $2,000,000) x 1/2 = $23,055

**($50,000 x 1/2) ÷ 10 = $2,500 per year

$2,500 X 3.5 = $8,750

Remaining Balance = $25,000 - $8,750 = $16,250 on 1/2 Bonds