Novak Co. is building a new hockey arena at a cost of $2,620,000. It received a

Question

Novak Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $530,000 from local businesses to support the project, and now needs to borrow $2,090,000 to complete the project. It therefore decides to issue $2,090,000 of 11%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Prepare the journal entry to record the issuance of the bonds on January 1, 2016. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. (Round answers to 0 decimal places, e.g. 38,548.)

Assume that on July 1, 2019, Novak Co. redeems half of the bonds at a cost of $1,126,600 plus accrued interest. Prepare the journal entry to record this redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Novak Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $530,000 from local businesses to support the project, and now needs to borrow $2,090,000 to complete the project. It therefore decides to issue $2,090,000 of 11%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Explanation / Answer

ISSUE PRICE: Present value of Interest of $ 229,900 for 10 years at 10% 1412637 ($ 229,900 with Annuity factor of year10 at 10% i.e. 6.14457) Present value of maturity value of $ 2090,000 at end of Year-3 805778.6 ($ 2090,000 * PVF of Year-10 at 10% i.e. 0.38554) Issue price of bonds 2218415 Req 1: Journal entry for issue: Cash Acccount Dr. 2,218,415        Bonds payable account 2,090,000        Premium on Bonds payable 128,415 Req 2 Amortization schedule: Date Cash Interest Premium Unamortized Book value of Interest Expense Amortization Premium Bonds Jan 1 2016 128415 2218415 Dec 31 2016 229900 221842 8058 120357 2210357 Dec 31 2017 229900 221036 8864 111493 2201493 Dec 31 2018 229900 220149 9751 101742 2191742 Dec 31 2019 229900 219174 10726 91016 2181016 Dec 31 2020 229900 218102 11798 79218 2169218 Req 3 Journal entries July 1 2019 Interest expense Dr. (219174/2) 109587 Premium on Bonds payable Dr. (10726/2) 5363       Interest payable Account (229900/2) 114950 July 12019 Bonds payable Dr. 1045000 Premium on Bonds payable Account Dr. 45508 Interest payable Dr. 114950 Loss on retirement of bonds 36092        Cash Account 1241550 Note: Premium on bonds payable written off: Premium balance on Dec 31 2018: 101742 Half to be closed due to redemption 50871 Less: Ammortized on July1 5363 Premium balance to be closed 45508

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