Question

Problem 14-2 Culver Co. is building a new hockey arena at a cost of $2,430,000. It received a downpayment of $490,000 from local businesses to support the project, and now needs to borrow $1,940,000 to complete the project. It therefore decides to issue $1,940,000 of 11%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Prepare the journal entry to record the issuance of the bonds on January 1, 2016. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit January 1, 2016 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. (Round answers to 0 decimal places, e.g. 38,548.) Date Cash Paid Interest Expense Premium Amortization Carrying Amount of Bonds 1/1/16 $ $ $ $ 1/1/17 1/1/18 1/1/19 1/1/20 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Assume that on July 1, 2019, Culver Co. redeems half of the bonds at a cost of $1,049,200 plus accrued interest. Prepare the journal entry to record this redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit July 1, 2019 (To record interest) July 1, 2019 (To record reacquisition)

Answer 1

Journal entry to issuance of bonds payable:

Date	Account title and explanation	Debit	Credit
Jan 1,2016	Cash	$2,059,199
	Premium on bonds payable		$119,199
	Bonds payable		$1,940,000
	[To record issuance of bonds payable]

Calculations:

Interest = $1,940,000 x 11% = $213,400

Present value of interest	$1,311,251
[213,400 x 6.14457 Present value annuity factor (10%, 10 years) ]
Present value of the face value	$747,948
[1,940,000 x 0.38554 Present value factor (10%, 10 years)]
Issue price of the bonds	$2,059,199

Amortization table:

Date	Cash Paid	Interest Expense	Premium amortization	Carrying amount
1/1/2016				$2,059,199
1/1/2017	$213,400	$205,920	$7,480	$2,051,719
1/1/2018	$213,400	$205,172	$8,228	$2,043,491
1/1/2019	$213,400	$204,349	$9,051	$2,034,440
1/1/2020	$213,400	$203,444	$9,956	$2,024,484

Journal entries to re-acquisition:

Date	Account title and explanation	Debit	Credit
July 1,2019	Interest expense [2,034,440 x 50%] x 10% x (6/12)]	$50,861
	Premium on bonds payable	$2,489
	Cash [1,940,000 x 50%] 11% x (6/12)]		$53,350
	[To record interest]
July 1,2019	Bonds payable [1,940,000 x 50%]	$970,000
	Premium on bonds payable	$41,402
	Loss on redemption of bonds payable	$37,798
	Cash		$1,049,200
	[To re-acquisition]