Stellar Co. is building a new hockey arena at a cost of $2,690,000. It received

Question

Stellar Co. is building a new hockey arena at a cost of $2,690,000. It received a downpayment of $550,000 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, 2016, and pay interest annually on each January 1. The bonds yield 11%

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, Stellar Co. redeems half of the bonds at a cost of $1,173,900 plus accrued interest. Prepare the journal entry to record this redemption.

Explanation / Answer

Par value of bonds 2140000 Cash interest paid 214000 Annuity PV for 10 years at 11% 5.8892 PVF for 10th year at 11% 0.35218 Present value f interest paid 1260289 Present value of Maturity value 753665.2 Issue price of bonds 2013954 Journal entry for issue: Cash account Dr. 2013954 Discount on bonds payable Dr. 126046      Bonds payable account 2140000 Amort Chart Date Cash Interest Discount Unamortized Carrying value Interest Expense amortized Discount Bonds 01.01.16 126046 2,013,954 01.01.17 214000 221,535 7,535 118,511 2,021,489 01.01.18 214000 222,364 8,364 110,147 2,029,853 01.01.19 214000 223,284 9,284 100,863 2,039,137 01.01.20 214000 224305 10,305 90,558 2,049,442 Redemption of bonds on July1, 2019: Interest cash to be paid (2140000*10%*6/12*1/2): 53500 Discount amortized (10305*6/12*1/2): 2576 Bonds Par value to be redeemed: 1070000 (2140000*1/2) less: Unamortized discount 47855 (100863*1/2 - 2576) Carrying value of bonds on July1 2019 1022145 Redemption value of bonds 1173900 Loss on redemption f bonds 151755 Journal entries on redemption: Date Accounts title and explanations Debit $ Credit $ 01.07.19 Interest expense Dr. 56076     Cash account 53500     Discount on bonds payable 2576 01.07.19 Bonds payable Dr. 1070000 Loss on redemption of bonds Dr. 151755      Cash account 1173900      Discount on bonds payable 47855

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