Question

Problem 14-02 (Part Level Submission) Metlock Co. is building a new hockey arena at a cost of $2,460,000. It received a downpayment of $500,000 from local businesses to support the project, and now needs to borrow $1,960,000 to complete the project. It therefore decides to issue $1,960,000 of 10%, 10-year bonds. These bonds were issued on January 1, 2019, and pay interest annually on each January 1. The bonds yield 9%.

Please show all work. Thanks!

Answer 1

Interest payment = $1,960,000 x 10% = $196,000

Present value of the interest payments	$1,257,861
[$196,000 x 6.41766 present value annuity factor (9%, 10 years)]
Present value of the face value	$827,924
[$1,960,000 x 0.42241 present value of factor (9%, 10 years)]
Proceeds from issuance of bonds	$2,085,785

Bond Amortization Schedule:

Date	Cash Paid	Interest Expense	Premium Amortization	Carrying amount of bonds
1/1/19				$2,085,785
1/1/20	$196,000	$187,721	$8,279	$2,077,506
1/1/21	$196,000	$186,976	$9,024	$2,068,481
1/1/22	$196,000	$186,163	$9,837	$2,058,644
1/1/23	$196,000	$185,278	$10,722	$2,047,922

Cash paid = Interest payment

Interest expense = Preceding carrying amount of bonds x 9%

Premium amortization = Cash paid - Interest expense

Carrying amount of bonds = Preceding amount of bonds - Premium amortization