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

Question

Headland 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 o decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation January 1, 2016 SHOW LIST OF ACCOUNTS Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. (Round answers to o decimal places, e.g. 38,548.) Cash Paid Date Interest Expense Carrying Amount of Bonds Premium Amortization 1/1/16 $ 1/1/17 1/1/18 1/1/19 1/1/20

Explanation / Answer

Solution 1:

Face value of bond issued = $2,090,000

coupon rate = 11%

Maturity period = 10 years

Yield = 10%

Issue price of bond = Present value of interest and maturity discounted at yield

= ($2,090,000*11%) * cumulative PV factor at 10% for 10 period + $2,090,000 * PV Factor at 10% at 10 periods

= $229,900 * 6.14457 + $2,090,000 * 0.38554 = $2,218,421

Solution 2:

Solution 3:

Journal Entries - Headland Company Date Particulars Debit Credit 1-Jan-16 Cash Dr $2,218,421.00        To Bonds Payable $2,090,000.00        To Premium on Bonds Payable $128,421.00 (being bond issued at premium)

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