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

Question

Sarasota Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $450,000 from local businesses to support the project, and now needs to borrow $2,170,000 to complete the project. It therefore decides to issue $2,170,000 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%.

a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method

c) Assume that on July 1, 2019, Sarasota Co. redeems half of the bonds at a cost of $1,139,500 plus accrued interest. Prepare the journal entry to record this redemption.

Explanation / Answer

(a)

Present value of the principal

   $2,170,000 X .38554 (PV10, 10%).......................

$   836,622

Present value of the interest payments

   $238,700* X 6.14457 (PVOA10, 10%).................

1,466,709

Present value (selling price of the bonds).....

$2,303,331

          *$2,170,000 X 11% = $238,700

Cash............................................................................ .....................................................................................

2,303,331

          Bonds Payable................................................

2,170,000

          Premium Bonds Payable..............................

133,331

(b)

Date

Cash Paid

Interest Expense

Premium Amortization

Carrying Amount of Bonds

1/1/16

$2,303,331

1/1/17

$238,700

$230,333

$8,367

2,294,964

1/1/18

238,700

229,496

9,204

2,285,760

1/1/19

238,700

228,576

10,124

2,275,636

1/1/20

238,700

227,564

11,136

2,264,500

(c)

Carrying amount as of 1/1/19..............................

$2,275,636

Less: Amortization of bond premium

            (11,136 ÷ 2)..................................................

         5,568

Carrying amount as of 7/1/19..............................

$2,270,068

Reacquisition price...............................................

$1,139,500

Carrying amount as of 7/1/19

   ($2,270,068 ÷ 2)...................................................

(1,135,034)

Loss on redemption of bonds............................ ..................................................................................

$     4,466

Entry for accrued interest

Interest Expense................................................

56,891

Premium on Bonds Payable

   ($11,136 X 1/2 X 1/2).......................................

2,784

          Cash

             ($238,700 X 1/2 X 1/2)...........................

59,675

Entry for reacquisition

Bonds Payable...................................................

1,085,000

Premium on Bonds Payable............................

50,034*

Loss on Redemption of Bonds ......................

4,466

          Cash............................................................

1,139,500

*Premium as of 7/1/19 to be written off

   ($2,270,068 – $2,170,000) X 1/2 = $50,034

(a)

Present value of the principal

   $2,170,000 X .38554 (PV10, 10%).......................

$   836,622

Present value of the interest payments

   $238,700* X 6.14457 (PVOA10, 10%).................

1,466,709

Present value (selling price of the bonds).....

$2,303,331

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