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In: Accounting

Stellar Co. is building a new hockey arena at a cost of $2,690,000. It received a...

Stellar Co. is building a new hockey arena at a cost of $2,690,000. It received a downpayment of $550,000 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.

Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method.

Assume that on July 1, 2019, Stellar Co. redeems half of the bonds at a cost of $1,173,900 plus accrued interest. Prepare the journal entry to record this redemption.

Solutions

Expert Solution

Par value of bonds 2140000
Cash interest paid 214000
Annuity PV for 10 years at 11% 5.8892
PVF for 10th year at 11% 0.35218
Present value f interest paid 1260289
Present value of Maturity value 753665.2
Issue price of bonds 2013954
Journal entry for issue:
Cash account Dr. 2013954
Discount on bonds payable Dr. 126046
     Bonds payable account 2140000
Amort Chart
Date Cash Interest Discount Unamortized Carrying value
Interest Expense amortized Discount Bonds
01.01.16 126046 2,013,954
01.01.17 214000 221,535 7,535 118,511 2,021,489
01.01.18 214000 222,364 8,364 110,147 2,029,853
01.01.19 214000 223,284 9,284 100,863 2,039,137
01.01.20 214000 224305 10,305 90,558 2,049,442
Redemption of bonds on July1, 2019:
Interest cash to be paid (2140000*10%*6/12*1/2): 53500
Discount amortized (10305*6/12*1/2): 2576
Bonds Par value to be redeemed: 1070000
(2140000*1/2)
less: Unamortized discount 47855
(100863*1/2 - 2576)
Carrying value of bonds on July1 2019 1022145
Redemption value of bonds 1173900
Loss on redemption f bonds 151755
Journal entries on redemption:
Date Accounts title and explanations Debit $ Credit $
01.07.19 Interest expense Dr. 56076
    Cash account 53500
    Discount on bonds payable 2576
01.07.19 Bonds payable Dr. 1070000
Loss on redemption of bonds Dr. 151755
     Cash account 1173900
     Discount on bonds payable 47855

ekkarill92 answered 2 years ago
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