Question

Cheyenne Co. is building a new hockey arena at a cost of $2,680,000. It received a downpayment of $500,000 from local businesses to support the project, and now needs to borrow $2,180,000 to complete the project. It therefore decides to issue $2,180,000 of 10%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 9%.

Prepare the journal entry to record the issuance of the bonds on January 1, 2016. Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. Assume that on July 1, 2019, Cheyenne Co. redeems half of the bonds at a cost of $1,156,700 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

Bond is a fixed income security in which issuer promises pay a series of interest payment and repay the principle on maturity to the investor.The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/(premium) which will be amortised.

$21,80,000 10.00% Date Face Value Stated Rate Coupon Payment Market Rate Maturity Period Beginning Book Value (A) Cash Paid Annually (B) 9.00% 10 Jan 1, 2016 Jan 1, 2017 Jan 1, 2018 Jan 1, 2019 Jan 1, 2020 Interest | Premium Unamortised closing Expense Amortised Premium Book Value (C) (D) = (B) + (C) (A) + (D) - (B $1,39,904 $23,19,904 $2,08,791 $9,209 $1,30,695 $23,10,695 $2,07,963 $10,037 $1,20,658 $23,00,658 $2,07,059 $10,941 $1,09,717 $22,89,717 $2,06,075 $11,925 $97,792 $22,77,792 $23,19,904 $23,10,695 $23,00,658 $22,89,717 $2,18,000 $2,18,000 $2,18,000 $2,18,000 Carrying Value of Bond Add: Unamortised Premium Cash Paid on redemption Gain on redemption $11,44,859 $54,859 -$11,56,700 $43,017 Coupon payment frequency Coupon Rate consider for calculation 10.00% Coupon Payment $2,18,000 [$2180000 x 10%] Market Rate Consider for Calculation 9.00% Period 10 Present Value of Coupon Payments Present Value of Annuity of $1 for rate 9% 6.41766 Present Value of Coupon Payments (A) $13,99,050 [$218000 x 6.41766] Present Value of Maturity Value Present Value of $1 for rate 9% 0.42241 Present Value of Maturity Value (B) $9,20,854 ($2180000 x 0.42241 Present Value of Bond = Present Value of Coupon Payment + Present Value of Present Value of Bond [(A) + (B)] $23,19,904 Credit Date July 1, 2019 Account Title Bond Payable Premium on Bond Payable Gain on Redemption of Bond Debit $11,44,859 $54,859 $43,017 $11,56,700 Cash (To record redemption of bond) Issue price of the Bond $23,19,904