Question

1. StarCenter Co. is building a new music arena at a cost of $5,600,000. It received a down payment of $600,000 from local businesses to support the project, and now needs to borrow $5,000,000 to complete the project. It therefore decides to issue $5,000,000 of 8%, 15-year bonds. These bonds were issued on January 1, 2016, and pay interest semi-annually on each January 1 and July 1. The bonds yield 6%. Instructions

(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, 2018, using the effective-interest method.

(c)Assume that on January 1, 2018, StarCenter Co. retires 20% of the bonds at a cost of $1,045,000 after the interest payment had been recorded. Prepare the journal entry to record this retirement.

Answer 1

Part 1

Coupon rate per Period (8%/2)	4.00%
Face value of bond	$    5,000,000
Market rate per Period (6%/2)	3.00%
Interest paid (5000000*4%)	$        200,000
Interest paid on	Semi annually
Number of period (15*2)	30

Market rate per Period used for PV factor.
Market rate per Period		3.00%
Period	PV factor	PVA factor
1	0.97087	0.97087
2	0.94260	1.91347
3	0.91514	2.82861
4	0.88849	3.71710
5	0.86261	4.57971
6	0.83748	5.41719
7	0.81309	6.23028
8	0.78941	7.01969
9	0.76642	7.78611
10	0.74409	8.53020
11	0.72242	9.25262
12	0.70138	9.95400
13	0.68095	10.63496
14	0.66112	11.29607
15	0.64186	11.93794
16	0.62317	12.56110
17	0.60502	13.16612
18	0.58739	13.75351
19	0.57029	14.32380
20	0.55368	14.87747
21	0.53755	15.41502
22	0.52189	15.93692
23	0.50669	16.44361
24	0.49193	16.93554
25	0.47761	17.41315
26	0.46369	17.87684
27	0.45019	18.32703
28	0.43708	18.76411
29	0.42435	19.18845
30	0.41199	19.60044

	Amount	Multiply: PV factor	Present value
Face value	$    5,000,000	0.41199	$    2,059,950
Interest paid	$        200,000	19.60044	$    3,920,088
Issue price of bonds (Total of above)			$    5,980,038
Less: face value of Bond			$    5,000,000
Premium on Bond payable			$        980,038

Date	Account title	Debit	Credit
Jan 1, 2016	Cash	5,980,038
	Bond payable		5,000,000
	Premium on bond payable		980,038
	(To record issued of bond payable at Premium.)

Part 2

Interest payment (Credit Cash) = Face value of bond * Coupon rate

Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate

Amortization of bond premium (Debit Bond Premium) = Interest payment - Interest Expense

Credit Balance in Bond premium = Credit Balance in Bond premium for previous period - Amortization of bond premium

Credit Balance in Bond Payable = Face value of bond

Book value of Bond = Credit Balance in Bond premium + Credit Balance in Bond Payable

Bond Premium Amortization Table
Period	Date	Interest payment (Cash paid)	Interest Expense @ 3%	Amortization of bond premium	Credit Balance in Bond premium	Credit Balance in Bond Payable	Book (carrying) value of Bond
0	Jan 1, 2016				980,038	5,000,000	5,980,038
1	Jul 1, 2016	200,000	179,401	20,599	959,439	5,000,000	5,959,439
2	Jan 1, 2017	200,000	178,783	21,217	938,222	5,000,000	5,938,222
3	Jul 1, 2017	200,000	178,147	21,853	916,369	5,000,000	5,916,369
4	Jan 1, 2018	200,000	177,491	22,509	893,860	5,000,000	5,893,860

Part 3

Face value of 20% bonds (5000000*20%)	$        1,000,000
Add: Umamortized bonds premium for 20% bonds (893860*20%)	$            178,772
Book value of 20% Bond on Jan 1, 2018	$        1,178,772
Cash paid	$        1,045,000
Gain on retirement of bonds	$            133,772

Date	Account title	Debit	Credit
Jan 1, 2018	Bond payable	$      1,000,000
	Premium on bond payable	$         178,772
	Gain on retirement of bond payable		$         133,772
	Cash		$      1,045,000
	(To record retirement of bond payable)