Question

Please explain how to get each of the numbers. For example, explain how you get the present value of the bonds using the excel PV function and how you get each of the numbers for the amortization schedule and journal entries. Thanks so much.

P14-2IL01,2) Issuance and Redemption of Bonds Venezuela Co. is building a new hockey arena. Information concerning the arena follows. $ $ $ $ 2,500,000 500,000 2,000,000 2,000,000 Cost of arena Down payment received from local businesses to support the project Borrowing needed to complete the project Issuance of bonds on January 1, 2019 Interest is paid annually on January 2. Stated interest rate on bonds Term of bonds in years Yield on bonds 10.50% 10 10.00% Note: Excel uses more decimal places than used in the solutions provided by the author. As such, the answers shown below will differ slightly from those in the solutions manual due to rounding and significant digits. Instructions: (a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2019. Present value of the bonds using Excel PV function: Debit Credit Jan. 1 (b) Prepare a bond amortization schedule up to and including January 1, 2023, using the effective interest method. Interest Paid Interest Expense Premium Amort. Bond Carrying Value Date (c) Assume that on July 1, 2022, 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. Debit Credit Entry to pay accrued interest Jul. 1

Answer 1

Venzuela Co. Requirement a Present value of the principal = $20,00,000 X 0.38554 = (PV of $1 for 10 periods at 10%) = $578,310 (A) Present value of principal formula = $7,71,087 PV(10%,10,0,-2000000,0) Present value of the interest = $2,10,000 X 6.14457 = (PV of a $1 anuity for 10 periods at 10%) = $967,770 (B) Present value of interest formula = $12,90,359 PV(10%,10,-2000000*10.5%,0,0) Present selling value of the bonds = $20,61,446 A+B Jan 1, 19 20,61,446 Cash Unamortized Bond Issue Costs Bonds Payable Premium Bonds Payable 20,00,000 61,446 Requirement b 2000000 x 10.5% = 210000 Interest Premium Date Interest Paid Expense @ © Amortization 10% Jan 1, 19 Jan 1, 20 Jan 1, 21 Jan 1, 22 Jan 1, 23 $2,10,000 2,10,000 2,10,000 2,10,000 $2,06,145 2,05,759 2,05,335 2,04,868 Bond Carrying Value $20,61,446 20,57,590 20,53,349 20,48,684 20,43,553 $3,855 4,241 4,665 5,132 $10,65,000 (c) Assume that on July 1, 2022, Venzuela Co. retires half of the bonds at a cost of plus accrued interest. Prepare the journal entry to record this retirement. Hint: Resolve value of unamortized bond issue costs for the bonds being retired. Unamortized bond issue costs Years of bond issue Unamortized bond issue costs per year Unamortized bond issue costs per six months Six month periods to July 1, 2012 Unamortized bond issue costs to July 1, 2012 Remaining unamortorized bond issue costs as of July 1, 2012 Bonds retired as a percentage of bonds issued Value of remaining unamortized bond issue costs to retired bonds Hint: Resolve carrying value of the bonds being retired. Interest Interest Premium Date Paid Expense Amortization Jan 1, 19 Jan 1, 20 $2,10,000 $2,06,145 $3,855 Jan 1, 21 2 ,10,000 2,05,759 Jan 1, 22 2,10,000 2,05,335 4,665 Percentage of bonds to be retired in the year Carrying value on Jan 1, 2022 of the bonds to be retired Interest on bonds to be retired as of July 1, 2022 Jul 1, 22 52,500 51,217| 1,283 Bond Carrying Value $20,61,446 20,57,590 20,53,349 20,48,684 50% 10,24,342 10,23,059 Reacquisition price Carrying value as of July 1, 2022 $10,65,000 10,23,059 41,941 Unamortized bond issue costs Loss $41,941 Entry for accrued interest Interest Expense (10,24,342 * 10.00% * (6/12)] Premium on Bonds Payable Cash ($10,00,000*10.50%*(6/12)] 51,217 1,283 52.500 Entry for reacquisition Bonds Payable ($20,00,000 * 50%) Premium on Bonds Payable Loss on Redemption of Bonds Unamortized Bond Issue Costs Cash 10,00,000 23,059 41,941) 10,65,000 The loss is reported as an ordinary loss.