Venezuela Co. is building a new hockey arena at a cost of $2,659,000. It receive

Question

Venezuela Co. is building a new hockey arena at a cost of $2,659,000. It received a downpayment of $506,700 from local businesses to support the project, and now needs to borrow $2,152,300 to complete the project. It therefore decides to issue $2,152,300 of 11%, 10 year bonds. These bonds were issued on January 1, 2011, and pay interest annually on each January 1. The bonds yield 10%. Venezuela paid $56,400 in bond issue costs related to the bond sale.

(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2011.

(b) Prepare a bond amortization schedule up to and including January 1, 2015, using the effective interest method. (Round answers to 0 decimal places, e.g. $38,548.)

(c) Assume that on July 1, 2014, Venezuela Co. retires half of the bonds at a cost of $1,143,370 plus accrued interest. Prepare the journal entry to record this retirement. (Round answers to 0 decimal places, e.g. $38,548. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Explanation / Answer

a)

Present Value of Bond issue = PV of Interest payment + PV of face value at the maturity

Present Value of Bond issue = 2152300*11%*PVA(10%,10) + 2152300*PV(10%,10)

Present Value of Bond issue = 2152300*11%*6.14457 + 2152300*0.38554

Present Value of Bond issue = $ 2,284,543

Journal Entry

b)

(c) Assume that on July 1, 2014, Venezuela Co. retires half of the bonds at a cost of $1,143,370 plus accrued interest. Prepare the journal entry to record this retirement

Journal Entry

On half of the bond

Unamortised Bond issue cost till jan 1 2014 = 56400*1/2 * 1/10 * 7 = 19740

Amortisation of Bond issue cost each year on half of bond = 56400*1/2 * 1/10 = 2820

Amortisation of Bond issue cost on half of bond upto july 1 = 2820*1/2 = 1410

After amortising Unamortised Bond issue cost till jul 1 2014 = 19740-1410 = 18330

Bond carrying value on Jan 1 on half of bond = 2257074*1/2 = $ 1,128,537

Interest Expense on half of Bond till july 1 = 1128537*10% *1/2= 56427

Interest to be paid = 2152300*1/2*11%*1/2 = $ 59188

Bonds premium to be amortised = 59188 - 56427 = 2761

Bonds Carrying value on july 1 = 1128537-2761 = 1125776

Bonds Payable = 2152300*1/2 = 1076150

Unamortised Bond Premium after on july 1 on half bond = 1125776-1076150 = 49626

Account Title & Explaination Debit Credit Cash 2228143 Unamortised Bond Issue cost 56400 Bonds Payable 2152300 Bonds Premium 132243

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