Question

Teal Co. is building a new hockey arena at a cost of $2,600,000. It received a downpayment of $460,000 from local businesses to support the project, and now needs to borrow $2,140,000 to complete the project. It therefore decides to issue $2,140,000 of 12%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 11%. 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 0 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 LINK TO TEXT LINK TO TEXT Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. (Round answers to 0 decimal places, e.g. 38,548.) Date Cash Paid Interest Expense Premium Amortization Carrying Amount of Bonds 1/1/16 $ $ $ $ 1/1/17 1/1/18 1/1/19 1/1/20 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Assume that on July 1, 2019, Teal Co. redeems half of the bonds at a cost of $1,143,800 plus accrued interest. Prepare the journal entry to record this redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit July 1, 2019 (To record interest) July 1, 2019 (To record reacquisition) Click if you would like to Show Work for this question: Open Show Work SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Answer 1

Solution:

Bond Yield is given in the question. So we need to calculate the Price of the bonds issued by using the Bond Yield Rate.

Part 1 -- Calculation of Bond Issue Price (Bond Yield Rate 10%)

Face Value of the bonds = $2,140,000

Annual Coupon Interest = Face Value 2,140,000 * Coupon Rate 12% = $256,800

Period to maturity (n) = 10

Annual Market Interest Rate (R) = 11%

Present Value of Bonds (Bond Issue Price) = Annual Coupon Interest x PVIFA (R, n) + Par Value x PVIF (R, n)

= ($256,800*5.88923) + ($2,140,000*0.35218)

= $1,512,354 + $753,665

= $2,266,019

Note -- Calculation of Present Value Factor (Rounded to 5 decimal places)

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)ⁿ) / R

PVIFA (11%, 10) = (1 – 1/(1+0.11)¹⁰) / 0.11 = 5.88923

PVIF (R, n) = Present Value interest factor for ‘n’ period at ‘R’% = 1/(1+R)ⁿ

PVIF (11%, 10) = 1/(1+0.11)¹⁰ = 0.35218

In case the decimal places rounded to 3 decimal places, the answer will be slightly different

Bond Issue Price = $2,266,019

Bonds are issued at price higher than face value, it means bonds are issued at premium.

Premium on Bonds Payable = 2,266,019 – 2,140,000 = $126,019

Part 1 – Journal Entry to record issuance of bonds

Date	General Journal	Debit	Credit
Jan.1, 2016	Cash	$2,266,019
	Bonds Payable		$2,140,000
	Premium on Bonds Payable (Bal fig)		$126,019

Part 2 – Bond Amortization Schedule

Schedule of Bond Premium Amortization
Effective Interest Method
Date	Cash Paid (Face Value 2,140,000 * Coupon Interest Rate 12%)	Interest Expense (Carrying Value at beginning of the year * Market Interest Rate 11%)	Premium Amortized (Cash Paid - Interest Expense)	Carrying Amount of Bonds
1/1/16				$2,266,019
1/1/17	$256,800	$249,262	$7,538	$2,258,481
1/1/18	$256,800	$248,433	$8,367	$2,250,114
1/1/19	$256,800	$247,513	$9,287	$2,240,827
1/1/20	$256,800	$246,491	$10,309	$2,230,517

Part 3 – Journal Entry to record redemption

Redemption Value = $1,143,800 plus accrued interest for 6 months ($2,140,000*12%*1/2)

= $1,143,800 + $128,400

= $1,272,200

Date	General Journal	Debit	Credit
Jan.1, 2016	Bonds Payable ($2,140,000 / 2)	$1,070,000
	Premium on Bonds Payable (2250,114 – 2140,000)/2	$55,057
	Loss on Redemption of Bonds Payable (Bal fig)	$147,143
	Cash		$1,143,800
	Interest Payable		$128,400