Wishful Thinking (WT) School of Management is building a new facility on a piece

Question

Wishful Thinking (WT) School of Management is building a new facility on a piece of donated land.
It received a generous cash donation from a local business to support the project, and now needs to
borrow additional $12,000,000 to complete the project. Therefore WT School of Management
issued $12,000,000 of 7.00% 8?year bonds. These bonds were issued on January 1, 2015, and pay
interest annually on each January 1. The bond yield is 9.00%. WT School of Management incurred
$480,000 in bond issue costs related to the bond sale.

(c) Assume that on July 1, 2018, WT School of Management retires 60% of the bonds at a cost of
$7,200,000 plus accrued interest. Prepare journal entries to record this retirement (10
points, show your work).

FOLLOWING IS THE ANSWER. PLEASE JUST SHOW ME THE WORK TO GET TO THIS ANSWER

Entry for accrued interest (4 points) Interest Expense 298,797 (2pt) Discount on Bonds Payable Cash 46,797 (1pt) 252,000 (1pt) Entry for reacquisition (6 points) Bonds Payable Loss on Redemption of Bonds 7,200,000 (1pt) 675,278 (1pt) Discount on Bonds Payable Unamortized Bond Issue Costs Cash 513,278 (1pt) 162,000 (2pt) 7,200,000 (1pt) it

Explanation / Answer

The calculations have been performed below. Please note that there is slight difference in final answers on account of approximations.

_________

We need to determine the current selling price of the bonds. The bond price can be calcuated with the use of Present Value (PV) function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Yield, Nper = Period, PMT = Coupon Payment and FV = Face Value of Bonds

_________

Here, Rate = 9%, Nper = 8, PMT = 12,000,000*7% = $840,000 and FV = $12,000,000

Using these values in the above function/formula for PV, we get,

Current Bond Price (Opening Book Value) = PV(9%,8,840000,12000000) = $10,671,643

The calculations for the first journal entry are shown with the use of following amortization schedule:

There is a marginal difference of $2 for Interest Expense and Discount on Bonds Payable on account of approximate values.

___________

The calculations for the second journal entry are shown below:

Unamortized Bond Issue Costs = [(Total Bond Issue Costs - Total Bond Issue Costs/Total Maturity Period*Years for which Bond Issue Costs has been Amortized)]*60% = [480,000 - 480,000/8*3.5]*60% = $162,000

Discount on Bonds Payable = (Balance in Bond Discount Account as on 1st January 2018)*60% - Discount Amortized for the Period 1st Jan 2018 to 30th June 2018 = (933,517)*60% - 46,795 = $513,315 (which is higher by $37 on account of approximate calculations)

Loss on Redemeption of Bonds = Balance Amount (7,200,000 - 513,315 - 162,000 - 7,200,000) = $675,315 (which is higher by $37 on account of approximate calculations))

Year Interest Payment (Face Value*Coupon Rate) Interest Expense (Book Value*Yield) Amortization of Bond Discount (Interest Expense - Interest ) Payment) Balance in Bond Discount (A) Balance in Bonds Payable (B) Book Value (B-A) 1st Jan 2015 1,328,357 12,000,000 10,671,643 1st Jan 2016 840,000 960,448 120,448 1,207,909 12,000,000 10,792,091 1st Jan 2017 840,000 971,288 131,288 1,076,621 12,000,000 10,923,379 1st Jan 2018 840,000 983,104 143,104 933,517 12,000,000 11,066,483 1st Jul 2018 $252,000 (840,000*60%*1/2) $298,795 (11,066,483*9%*60%*1/2) $46,795

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