Venezuela Co. is building a new hockey arena at a cost of $2,587,000. It receive
ID: 2466323 • Letter: V
Question
Venezuela Co. is building a new hockey arena at a cost of $2,587,000. It received a downpayment of $515,000 from local businesses to support the project, and now needs to borrow $2,072,000 to complete the project. It therefore decides to issue $2,072,000 of 10%, 10 year bonds. These bonds were issued on January 1, 2013, and pay interest annually on each January 1. The bonds yield 9%. Venezuela paid $61,600 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, 2013.
(b) Prepare a bond amortization schedule up to and including January 1, 2017, using the effective interest method. (Round answers to 0 decimal places, e.g. 38,548.)
(c) Assume that on July 1, 2016, Venezuela Co. redeems half of the bonds at a cost of $1,112,410 plus accrued interest. Prepare the journal entry to record this redemption.
Explanation / Answer
The answers may slightly differ due to calculators or tables used and rounding.
a) Journal entry to record the issuance of bonds and the related bond issue costs incurred on Jan 1,2013.
No. of years =10
Interest rate = 10%
Effective Rate = 9%
Present Value of the principal at 9% for 10 years will account to
$2,072,000*0.42241= $875,233
Present value of the interest paid at annuity for 10 years at 9%
Interest amount = $2,072,000*10%= $207,200
Present value of interest formula = $207,200*6.4177 = $1,329,747
Present selling value of bonds= $875,233+$1,329,747 = $2,204,980
Journal entry done will be
Jan 1,2013 Cash Dr $2,143,380
Bond Issue cost Dr $61,600
To Bonds Pyable $2,072,000
To Premium on Bonds Payable $132,980
b) Bond amortization schedule upto and including Jan 1,2017, using the effective interest method
Date Bond Carrying Value Interest Paid Interest Expense Premium Amortization
Jan 1,2013 $2,204,980 $207,200 $198,448 $8,752
Jan 1,2014 $2,196,228 $207,200 $197,661 $9,539
Jan 1,2015 $2,186,689 $207,200 $196,802 $10,398
Jan 1,2016 $2,176,291 $207,200 $195,866 $11,334
Jan 1,2017 $2,164,957 $207,200 $194,846 $12,354
Interest expense is calculated at effective rate of 9%
c) Journal entry for recording the redemption
Carrying cost as on 1/1/2016 = $2,176,291
Less: Amortisation of bond premium (12.354/2) = $ 6,177
Carrying amount as on 1/7/2016= $2,170,114
Reacquisition Price= $1,112,410
Carrying amount as on 1/7/2016= ($1,085,057)
($2,170,114/2) ---------------
$27,353
Unamortised Bond Issue Cost
($61,600*1/2)/10 = $3,080 per year
$3,080*3.5years= $10,780
Remaining Balance= $30,800-$10,780= $20,020
Loss $47,373
Entry for Accrued interest
1/7/2016 Interest Expense $48,711
Premium on Bonds Payable $3,089
($12,354*1/2*1/2)
To Cash ($2,07,200*1/2*1/2) $51,800
Entry for Reacquisition
1/7/2016 Bonds Payable $1,036,000
Premium on Bonds Payable $49,057
($2,170,114-$2,072,000*1/2)
Loss on redemption of bonds $47,373
To Unamortised bond Issue cost $20,020
To Cash $1,112,410
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