Question

Bonita 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%. Prepare the journal entry to record the issuance of the bonds on January 1, 2016. Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method.

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	10
i=	10.00%
Cash flow	Table Value	Amount	Present Value
Interest (Annuity)	6.14457	$238,700.00	$1,466,708
Principal	0.38554	$2,170,000.00	$836,629
Price of bonds			$2,303,337

Journal Entries - Bonita Company
Date	Particulars	Debit	Credit
1-Jan-16	Cash Dr	$2,303,337.00
	To Bond Payable		$2,170,000.00
	To Premium on Bond Payable		$133,337.00
	(To record issue of bond at premium)

Bond Amortization Schedule - Effective interest method (Partial)
Date	Cash Paid	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
1-Jan-16				$133,337	$2,303,337
1-Jan-17	$238,700	$230,334	$8,366	$124,971	$2,294,971
1-Jan-18	$238,700	$229,497	$9,203	$115,768	$2,285,768
1-Jan-19	$238,700	$228,577	$10,123	$105,645	$2,275,645
1-Jan-20	$238,700	$227,564	$11,136	$94,509	$2,264,509