Question

Problem 14-2 Pronghorn Co. is building a new hockey arena at a cost of $2,360,000. It received a downpayment of $510,000 from local businesses to support the project, and now needs to borrow $1,850,000 to complete the project. It therefore decides to issue $1,850,000 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. (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, Pronghorn Co. redeems half of the bonds at a cost of $1,014,800 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)

Answer 1

PV of the bonds=(PV of its future coupon payments +PV of Face value to be received at maturity)both discounted at thebond's yield

PV of the all the future coupon of the bond using PVOA fomula+ PV of Face value of the bond using formula to find FV of single sum

ie. PV of the bond=(Pmt.*(1-(1+r)^-n)/r)+(FV/(1+r)^n)

where,

Pmt.=the annual coupon payment on the Face value, 1850000*11%=203500

r= the Yield 10%

n=no.of coupon payments=10

FV to be recd. At maturity= 1850000

So,plugging in the above values,in the formula,

PV of the bond=(203500*(1-(1+0.1)^-10)/0.1)+(1850000/(1+0.1)^10)

1963674

Journal entry to record the issuance of the bonds on January 1, 2016.
	Debit	Credit
Cash	1963674
Bonds payable		1850000
Premium on bonds payable		113674
(Issuance of bonds at premium)

Bond amortization schedule up to and including January 1, 2020, using the effective interest method.
1	2	3	4	5	6	7
Date	Coupon Int.payment at FV*11%	Int. exp. (Eff.int.10%*Prev.BV in 7	Amortsn. Of Bond Premium	Cr. Bal.in Bond Premium a/c	Cr. Bal.in Bonds Payable	BV of Bonds Payable
			(3-2)			(5+6)
	Cr. Cash	Dr. Int.Exp.	Dr. Bond Premium
Jan 1,2016				113674	1850000	1963674
Jan 1,2017	203500	196367	-7133	106541	1850000	1956541
Jan 1,2018	203500	195654	-7846	98696	1850000	1948696
Jan 1,2019	203500	194870	-8630	90065	1850000	1940065
Jan 1,2020	203500	194007	-9493	80572	1850000	1930572
Jan 1,2021	203500	193057	-10443	70129	1850000	1920129
Jan 1,2022	203500	192013	-11487	58642	1850000	1908642
Jan 1,2023	203500	190864	-12636	46006	1850000	1896006
Jan 1,2024	203500	189601	-13899	32106	1850000	1882106
Jan 1,2025	203500	188211	-15289	16817	1850000	1866817
Jan 1,2026	203500	186682	-16818	-1	1850000	1849999
Total	2035000	1921325	-113675

Position of Half of the FV of bonds at July,1,2019
Jan 1,2016				56837	925000	981837
Jan 1,2017	101750	98184	-3566	53271	925000	978271
Jan 1,2018	101750	97827	-3923	49348	925000	974348
Jan 1,2019	101750	97435	-4315	45033	925000	970033
July 1,2019	50875	48502	-2373	42659	925000	967659
	356125	341947	-14178

2019		Debit	Credit
1-Jul	Interest expense	50875
	Cash		50875
	(1850000/2*11%/2)
	(to record 6 mths.interest on half FV of the bonds)
	Cash(1014800-50875)	963925
	Premium on Bonds payable	42659
	Bonds payable		925000
	Gain on early redemption(Bal.fig.)		81584
	(to record re-acquisition)