Question

Blossom 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%.

a)	Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2016.

(b)	Prepare a bond amortization schedule up to and including January 1, 2017, using the effective-interest method.

Answer 1

Requirement a:

Date	Account title and explanation	Debit	Credit
01/01/2016	Cash	$2,218,415
	Bonds payable		$2,090,000
	Premium on bonds payable		$128,415
	[To record issuance of bonds]

Calculations:

Cash interest = $2,090,000 x 11% = $229,900

Present value of interest payment	$1,412,637
[$229,900 x 6.14457 PV annuity factor (10%, 10 years)]
Present value of face value	$805,779
[$2,090,000 x 0.38554 PV factor (10%, 10 years)]
Issue price of the bonds	$2,218,415

Requirement b:

Amortization Schedule
Date	Cash interest	Interest expense	Premium amortization	Carrying value
1/1/2016				$2,218,415
1/1/2017	$229,900	$221,842	$8,059	$2,210,357
1/1/2018	$229,900	$221,036	$8,864	$2,201,492
1/1/2019	$229,900	$220,149	$9,751	$2,191,741
1/1/2020	$229,900	$219,174	$10,726	$2,181,016
1/1/2021	$229,900	$218,102	$11,798	$2,169,217
1/1/2022	$229,900	$216,922	$12,978	$2,156,239
1/1/2023	$229,900	$215,624	$14,276	$2,141,963
1/1/2024	$229,900	$214,196	$15,704	$2,126,259
1/1/2025	$229,900	$212,626	$17,274	$2,108,985
1/1/2025	$229,900	$210,915*	$18,985	$2,090,000
	$2,299,000	$2,170,585	$128,415

*rounded to $17.

• Interest expense = Preceding carrying value x 10%
• Premium amortization = Cash interest - Interest expense
• Carrying value = Preceding carrying value - Premium amortization