Question

Splish Brothers Inc. is building a new hockey arena at a cost of $2,800,000. It received a down payment of $560,000 from local businesses to support the project, and now needs to borrow $2,240,000 to complete the project. It therefore decides to issue $2,240,000 of 10-year, 10.5% bonds. These bonds were issued on January 1, 2020, and pay interest annually on each January 1. The bonds yield 10% to the investor and have an effective interest rate to the issuer of 10.4053%. (There is an increased effective interest rate due to the capitalization of the bond issue costs.) Any additional funds that are needed to complete the project will be obtained from local businesses. Splish Brothers Inc. paid and capitalized $56,000 in bond issuance costs related to the bond issue. Splish Brothers prepares financial statements in accordance with IFRS.

1- Using (1) factor tables, (2) a financial calculator, or (3) Excel function PV, calculate the value of the bonds and prepare the journal entry to record the issuance of the bonds on January 1, 2020.

2- Prepare a bond amortization schedule up to and including January 1, 2025, using the effective interest method.

3- Assume that on July 1, 2023, the company retires half of the bonds at a cost of $1,193,000 plus accrued interest. Prepare the journal entries to record this retirement.

Answer 1

	Face Value
	$2,240,000 x PV of $1 10.%, 10	$863,616
	$2,240,000 x 0.385543
	Interest
	$235,200 x PVA of $1 10%, 10	$1,445,202
	$$235,200 x 6.144567
		$2,308,818
1
Date	General Journal	Debit	Credit
Jan 1, 2020	Cash	$2,252,818
	Unamortized Bond Issue Costs	$56,000
	Bonds Payable		$2,240,000
	Premium on Bonds Payable		$68,818
2
Date	Interest Paid	Interest Exp.	Amortization	Carrying Value
Jan 1, 2020				$2,308,818
Jan 1, 2021	$235,200	$230,882	$4,318	$2,304,500
Jan 1, 2022	$235,200	$230,450	$4,750	$2,299,750
Jan 1, 2023	$235,200	$229,975	$5,225	$2,294,525
Jan 1, 2024	$235,200	$229,452	$5,748	$2,288,777
Jan 1, 2025	$235,200	$228,878	$6,322	$2,282,455
Jan 1, 2020	Bonds Payable	$1,120,000
	Premium on Bonds Payable	$25,826		[(54,525 / 2) - (5,748 / 2 x 50%)]
	Loss on Bond Redemption	$65,375
	Unamortized Bond Cost		$18,200	[(56,000 / 2) - (56,000 / 2) / 10 * 3.5]
	Cash		$1,193,000