Question

Splish 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, 2019, 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, 2019.

Prepare a bond amortization schedule up to and including January 1, 2023, using the effective interest method.

Date		Cash Paid		Interest Expense		Premium Amortization		Carrying Amount of Bonds
1/1/19		$		$		$		$
1/1/20
1/1/21
1/1/22
1/1/23

Assume that on July 1, 2022, Splish Co. redeems half of the bonds at a cost of $1,126,600 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

(a) Present value of the principal for 10 periods at 11%

$2140000 * PVIF (10th year, 11%)

$2140000 * 0.35218447874 = $753675

Present value of interest formula :-

Interest = $2140000 * 12% = $256800

$256800 * PVAF (10 years, 11%)

$256800 * 5.88923201096 = $1512355

Present selling value of the bonds = $753675 + $1512355 = $2266030

Date	Account Titles	Debit	Credit
Jan 1, 2019	Cash	$2266030
	Bonds Payable		$2140000
	Premium Bonds Payable		$126030

(b)Prepare a bond amortization schedule up to and including January 1, 2023, using the effective interest method :-

Date	Cash Paid	Interest Expense	Premium Amortization	Carrying Amount of Bonds
1/1/2019				$2,266,030
1/1/2020	$256,800	$249,263	$7,537	$2,258,493
1/1/2021	$256,800	$248,434	$8,366	$2,250,127
1/1/2022	$256,800	$247,514	$9,286	$2,240,841
1/1/2023	$256,800	$246,493	$10,307	$2,230,534