Question

Problem 14-2 Flounder Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $530,000 from local businesses to support the project, and now needs to borrow $2,090,000 to complete the project. It therefore decides to issue $2,090,000 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

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

Assume that on July 1, 2019, Flounder Co. redeems half of the bonds at a cost of $1,126,600 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

We have been provided with the following information
Bond amount which is also the bond redemption value		$2,090,000
No of years Bond outstanding		10
Coupon rate		11%
Yield to maturity		10%
Coupon amount	2,090,000*11%	$229,900
We would calculate the value of bond
Formula to calculate the value of bond is P0 = Sum of Present value of coupon payments for 10 years + Present value of bond redemption amount
Year	Cash flow	Discount factor @ 10%		Present Value (Cash flow*Discount factor)
1	$229,900	0.90909	1/(1.1^1)	$208,999.79
2	$229,900	0.82645	1/(1.1^2)	$190,000.86
3	$229,900	0.75131	1/(1.1^3)	$172,726.17
4	$229,900	0.68301	1/(1.1^4)	$157,024.00
5	$229,900	0.62092	1/(1.1^5)	$142,749.51
6	$229,900	0.56447	1/(1.1^6)	$129,771.65
7	$229,900	0.51316	1/(1.1^7)	$117,975.48
8	$229,900	0.46651	1/(1.1^8)	$107,250.65
9	$229,900	0.42410	1/(1.1^9)	$97,500.59
10	$2,319,900	0.38554	1/(1.1^10)	$894,414.25
				$2,218,412.94
The value of bond is $2,218,413
a)
Date	Account titles and Explanation	Debit	Credit
1-Jan-16	Cash	$2,218,413
	Bonds Payable		$2,090,000
	Premium on bonds payable		$128,413
	(To record issuance of bond)
b)
Date	Cash paid	Interest expense (Carrying amount of bonds at beginning year*10%)	Premium Amortization	Carrying amount of bonds
1/1/2016				$2,218,413
1/1/2017	$229,900	$221,841.30	$8,059	$2,210,354
1/1/2018	$229,900	$221,035.43	$8,865	$2,201,490
1/1/2019	$229,900	$220,148.97	$9,751	$2,191,739
1/1/2020	$229,900	$219,173.87	$10,726	$2,181,013
We will have to calculate the carrying amount of bonds which are being redeemed
Carrying value of bond as on 1/1/19		$2,191,739
percentage of bond retired		50%
Carrying value of bond to be retired		$1,095,870
Interest on date of bond retired
1/7/2019	57475	$54,793	$2,682	$1,093,188
	229900*50%*50%	1095870*10%*50%	(57475-54793)	(1095870-2682)
Journal entry for accrued interest payment
Date	Account titles and explanation	Debit	Credit
1-Jul-19	Interest Expense	$54,793
	Premium on bond payable	$2,682
	Cash		$57,475
	(To record interest)
1-Jul-19	Bonds Payable	$1,045,000
	Premium on Bond Payable	$48,188		(1093188-1045000)
	Loss on Redemption	$33,412		(1126600-1093188)
	Cash		$1,126,600
	(To record reacquisition)