Question 1 Nash Co. is building a new hockey arena at a cost of $2,430,000. It r

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Question 1 Nash Co. is building a new hockey arena at a cost of $2,430,000. It received a downpayment of $490,000 from local businesses to support the $1,940,000 to complete the project. It therefore decides to issue $1,940 000 of 11%, 10-year each January 1. The bonds yield 10% bonds. These bonds were issued on January 1, 2016, and pay interest annually on 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 O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit January 1, 2016 SHOW LIST OF ACCOUNTS

Explanation / Answer

Nash Co

date

Account Titles and Explanation

Debit

Credit

1-Jan-16

Cash

$2,059,213

Bonds Payable

$1,940,000

Premium on bonds Payable

$119,213

To record issue of bonds at premium)

Bond value = $1,940,000

Period = 10 years

Interest – yield rate – 10%

Present value = $1,940,000 x (P/F, 10%, 10)

Present value of $1 annuity for 10 years at 10% = 0.3855

Present value of the principal = $1,940,000 x 0.3855 = $747,870

Interest = $1,940,000 x 11% = $213,400

Present value of interest = $213,400 x (P/A, 10%, 10)

Present selling value of the bonds = 213,400 x 6.145 =$1,311,343

= $747,870 + 1,311,343 = $2,059,213

Issue value = $1,940,000

Premium on bond issue = 2,059,213 – 1,940,000 = $119,213

Bond Amortization Schedule (effective interest method) up to and including Jan 1, 2020

Date

Cash Paid

Interest Expense

Premium Amortization

Carrying Amount of Bonds

1-Jan-16

$2,059,213

1-Jan-17

$213,400

$205,921

$7,479

$2,051,734

1-Jan-18

$213,400

$205,173

$8,227

$2,043,507

1-Jan-19

$213,400

$204,351

$9,049

$2,034,458

1-Jan-20

$213,400

$203,446

$9,954

$2,024,504

date

Account Titles and Explanation

Debit

Credit

1-Jul-19

Interest Expense

$50,861

Bonds Payable - Premium

$2,489

Cash

$53,350

(To record interest)

1-Jul-19

Bonds Payable

$970,000

Bonds Payable - Premium

$44,740

Loss on redemption of bonds

$34,460

Cash

$1,049,200

Determination of the carrying value of the bonds being redeemed –

Date

Cash Paid

Interest Expense

Premium Amortization

Carrying Amount of Bonds

1-Jan-16

$2,059,213

1-Jan-17

$213,400

$205,921

$7,479

$2,051,734

1-Jan-18

$213,400

$205,173

$8,227

$2,043,507

1-Jan-19

$213,400

$204,351

$9,049

$2,034,458

Value of bonds being redeemed = ½ of $2,034,458 = $1,017,229

Interest expense = 1,017,229 x 10% x ½ = $50,861

Interest on bonds redeemed as at July 1, 2016 (half year) – $213,400 x ½ x 6/12 = $53,350

Date

Cash Paid

Interest Expense

Premium Amortization

Carrying Amount of Bonds

1-Jul-19

$53,350

$50,861

$2,489

$1,014,740

Reacquisition price = $1,049,200

Carrying value = $1,014,740

Loss on bond redemption = $34,460

Bonds payable premium (outstanding) = total premium – premium expired

= 50% of [$119,213 – (7,479 + 8,227 + 9,049 +1/2 (9,954))]

= $44,740

date

Account Titles and Explanation

Debit

Credit

1-Jan-16

Cash

$2,059,213

Bonds Payable

$1,940,000

Premium on bonds Payable

$119,213

To record issue of bonds at premium)

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