Question

Monty Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $480,000 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. (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, Monty Co. redeems half of the bonds at a cost of $1,135,200 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

Ans: A). Journal entry to record issuance of bonds On Jan 1,2016

Present value of bond= present value of principal and present value of interest together

Present value of bond=2,140,000*PVIF{11%,10)+ {2,140,000*12%*PVIFA(11%,10)}

Present value of bond= 2,140,000*0.3522+ 256,800*5.8892

Present value of bond= 753,708+ 1,512,346.56

Present value of bond = 2,266,054.56

Date	Account title and explanation	Debit($)	Credit($)
Jan 1,2016	cash	2,266,054.56
	Bonds Payable		2,140,000
	Premium on bonds payable		126,054.56
	( to record issuance of bonds)

B). Amortization Schedule

Date	Cash paid	Interest expense	Premium amortization	Carrying Amount of bonds
1/1/16				2,266,054.56
1/1/17	256,800	249,266*	7,534**	2,258,520.56***
1/1/18	256,800	248,437	8,363	2,250,157.56
1/1/19	256,800	247,517	9,283	2,240,874.58
1/1/20	256,800	246,496	10,304	2,230,570.58

*= 2,266,054.56*11% = 249,266

**= 256,800-249,266 = 7,534

***= 2,266,054.56-7,534= 2,258,520.56

C). Journal entry

Date	Account title and explanation	Debit($)	Credit($)
July 1,2019	Interest expense	61,624
	Premium on bonds payable{10304*1/2*1/2)	2,576
	Cash{256,800*1/2*1/2)		64,200
	{ to record interest expense and premium on bonds)
1 july 2019	Bonds payable	1,070,000
	Premium on bonds payable	47,861.50
	Loss on redemption of bonds	17,338.50
	Cash		1,135,200
	{to record bonds issue costs incurred}

Working Note:

1. Carrying amount as on 1 July 2019=:

Bond carrying amount= 2,240,875

Less:Amortization of premium bond:10,304/2 = 5,152

Carrying Amount as on 1 july 2019= 2,235,723

2. Loss on redemption of bond=

Reacquisition price= 1,135,200

Less:Carrying Amount = 1,117,861.50

(2,235,723/2)

Loss on redemption= 17,338.50

3. Premium as of 1 july 2019= 2,235,723-2,140,000)*1/2

=47,861.50