Question

Novak Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $480,000 from local businesses to support the project, and now needs to borrow $2,140,000 to complete the project. It therefore decides to issue $2,140,000 of 12%, 10-year bonds. These bonds were issued on January 1, 2019, and pay interest annually on each January 1. The bonds yield 11%.

Prepare a bond amortization schedule up to and including January 1, 2023, 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
1/1/19		$		$		$		$
1/1/20
1/1/21
1/1/22
1/1/23

Answer 1

Solution

Date	Cash Paid	Interest expense	Premium Amortization	Carrying amount of Bonds
1/1/2019				$        2,266,019
1/1/2020	$         256,800	$         249,262	$             7,538	$        2,258,481
1/1/2021	$         256,800	$         248,433	$             8,367	$        2,250,114
1/1/2022	$         256,800	$         247,513	$             9,287	$        2,240,827
1/1/2023	$         256,800	$         246,491	$           10,309	$        2,230,517

Working

	Annual Rate	Applicable rate		Face Value	$ 2,140,000
Market Rate	11.00%	11.00%		Term (in years)	10
Coupon Rate	12.00%	12.00%		Total no. of interest payments	10

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 2,140,000	at	11.00%	Interest rate for	10	term payments
PV of $1	0.35218
PV of	$ 2,140,000	=	$ 2,140,000	x	0.35218	=	$ 753,665	A
Interest payable per term	at	12.00%	on	$ 2,140,000
Interest payable per term	$ 256,800
PVAF of 1$	for	11.00%	Interest rate for	10	term payments
PVAF of 1$	5.88923
PV of Interest payments	=	$ 256,800	x	5.88923	=		$ 1,512,354	B
				Bond Value (A+B)			$ 2,266,019