Question

Larkspur Inc. is building a new hockey arena at a cost of $1,900,000. It received a down payment of $380,000 from local businesses to support the project, and now needs to borrow $1,520,000 to complete the project. It therefore decides to issue $1,520,000 of 10-year, 10.5% bonds. These bonds were issued on January 1, 2020, and pay interest annually on each January 1. The bonds yield 10% to the investor and have an effective interest rate to the issuer of 10.4053%. (There is an increased effective interest rate due to the capitalization of the bond issue costs.) Any additional funds that are needed to complete the project will be obtained from local businesses. Larkspur Inc. paid and capitalized $38,000 in bond issuance costs related to the bond issue. Larkspur prepares financial statements in accordance with IFRS.

A.) Using (1) factor tables, (2) a financial calculator, or (3) Excel function PV, calculate the value of the bonds and prepare the journal entry to record the issuance of the bonds on January 1, 2020. (Hint:Refer to Chapter 3 for tips on calculating. For the journal entry, use the amount arrived at using the time value of money tables.)

B.) Prepare a bond amortization schedule up to and including January 1, 2025, using the effective interest method.

C.) Assume that on July 1, 2023, the company retires half of the bonds at a cost of $809,000 plus accrued interest. Prepare the journal entries to record this retirement.

Answer 1

Part A

Present value function

Pmt = 1520000*10.50% = $159600

Nper = 10

Fv = 1520000

Rate=10%

PV function of excel

=-PV(rate,nper,PMT, (FV),type)

=-PV(10%,10,159600,1520000)

=$1566699

Date	General journal	Debit	Credit
Jan. 1	Cash	1528699
	Unamortized bond issue costs	38000
	Bonds payable		1520000
	Premium bonds payable		46699

Part B

Date	Interest paid	Interest expense (10%)	Premium amortization	Bond carrying
Jan1, 20				1566699
Jan1, 21	159600	156670	2930	1563769
Jan1, 22	159600	156377	3223	1560546
Jan1, 23	159600	156055	3545	1557001
Jan1, 24	159600	155700	3900	1553101
Jan1, 25	159600	155310	4290	1548811

Interest = 1520000*10.50% = 159600

Interest expense = previous bond carrying value * 10%

Premium amortization = interest paid – interest expense

Bond carrying value = previous bond carrying value – premium amortization

Part C

Unamortized Bond Issue Costs =(38000- (38000/10*6/12*7))*50% = 12350

Carrying value of bonds as of 1/1/23 (1557001*50%)	778501
Amortization of bond premium until 7/1/19 (159600/4)-(155700/4)	975
Carrying value of bonds as of 7/1/19	777526
Carrying value of ½ of bonds as of 7/1/19	777526
- reacquisition price of ½ of bonds (809000+12350)	821350
= gain or loss on redemption of ½ of bonds	-43824

Entry of accrued interest

Date	General journal	Debit	Credit
Jul. 1	Interest expense (778501*10%*6/12)	38925
	Premium on bonds payable	975
	Cash		39900

Entry for reacquisition

Date	General journal	Debit	Credit
Jul. 1	Bonds Payable ($1520000 × 50%)	760000
	Premium on bonds payable	17526
	Loss on Redemption of Bonds	43824
	Unamortized Bond Issue Costs		12350
	Cash		809000