Venezuela Co. is building a new hockey arena at a cost of $2,726,000. It receive

Question

Venezuela Co. is building a new hockey arena at a cost of $2,726,000. It received a downpayment of $510,600 from local businesses to support the project, and now needs to borrow $2,515,400 to complete the project. It therefore decides to issue $2,515,400 of 12%, 10 year bonds. These bonds were issued on January 1, 2013, and pay interest annually on each January 1. The bonds yield 11%. Venezuela paid $54,400 in bond issue costs related to the bond sale. (Round answers to 0 decimal places, e.g. 38,548.)

(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2013.

(b) Prepare a bond amortization schedule up to and including January 1, 2017, using the effective interest method.

(c) Assume that on July 1, 2016, Venezuela Co. redeems half of the bonds at a cost of $1,172,180 plus accrued interest. Prepare the journal entry to record this redemption.

Explanation / Answer

a) Present value of the principal for 10 periods at 11%

Present value of Principal = $ 885885

Present value of an annuilty for 10 periods @ 11%

Present value of interest = 1777885

Present selling value of bonds = 2663770

January 1, 2013

Cash Debit $ 2609370

Unamortized Bond value cost Debit $ 54400

Bonds Payable Credit $ 2515400

Premium Bonds Payable credit $ 148370

b)

c)

Bonds Payable Debit $ 1172180

Cash Credit $ 1172180

Date interest Paid interest expense Premium Amortization Bond Carrying value Januray 1, 2013 $2,663,770 Januray 1, 2014 $301,848 $293,015 $8,833 $2,654,937 Januray 1, 2015 $301,848 $292,043 $9,805 $2,645,132 Januray 1, 2016 $301,848 $290,965 $10,883 $2,634,249 Januray 1, 2017 $301,848 $289,767 $12,081 $2,622,168

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