Venezuela Co. is building a new hockey arena at a cost of $2,500,000. It receive
ID: 2462392 • Letter: V
Question
Venezuela Co. is building a new hockey arena at a cost of $2,500,000. It received a down payment of $500,000 from local businesses to support the project, and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2009, and pay interest annually on each January 1. The bonds yield 10%.
REQUIRED:
a) Calculate the issue price of the bonds.
b) Prepare the journal entry for the issuance of the bonds.
c) Prepare a bond amortization schedule up to and including January 1, 2013, using the effective-interest method.
d) Assume that on July 1, 2012, Venezuela Co. retires half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this retirement.
Explanation / Answer
Answer a
Present value of the principal (PV of $1 for 10 periods at 10%) => $2000000 × 0.38554 = = $771080
Present value of the interest (PV of a $1 anuity for 10 periods at10%) => $210,000 × 6.14457 => $1290360
Issue price of the bonds. => $2061440
Answer b
Cash A/c Dr. $2061440
To Bonds Payable A/c Cr. $2000000
To Premium on Bonds A/c Cr. $61440
Answer c
Answer d
Percentage of bonds to be retired in the year => 50%
Carrying value on Jan 1, 2012, of the bonds to be retired => $1024338
interest on bonds to be retired on july 01, 2012
Interest paid => 52500 , Interest expense=> 51217, Pre. Ammor. => 1283, Carrying Value => 1023055
Jouirnal entry
Entry for accrued interest
Interest Expense A/c Dr. $51217
Premium on Bond Payable A/c Dr. $1283
To Cash A/c Cr. $52500
Entry for reacquisition
Bonds Payable A/c Dr. $1000000
Premium on Bonds Payable A/c Dr. $23055
Loss On redemption of Bonds A/c Dr. $41945
To Cash A/c Cr. $1065000
Date Interest Paid Interest expense Premium Amortization Bond Carrying Value 01/01/2009 2061440 01/01/2010 210000 206144 3856 2057584 01/01/2011 210000 205758 4242 2053342 01/01/2012 210000 205334 4666 2048676 01/01/2013 210000 204868 5132 2043544Related Questions
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