Venezuela Co. is building a new hockey arena at a cost of $2,587,000. It receive

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

(a)

(b)

Issue cost amortization per year = $61600 / 10 years = $6160

(c)

For unamortised issue cost:

Total issue cost amortised = 6160 x 4 = $24640

Unamortised issue cost = as on July 1 = 61600 - 24640 - 3080 =33880

For half of the bomds = 33880/2 = $16940

Date Account Title and explanation Debit($) Debit($) Jan 1, 2013 Cash 2142594 Issue cost 61600 Premium on bonds payable 132194 Bonds payable 2072000

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