Question

Venezuela Co. is building a new hockey arena at a

cost of $8,000,000 . It received a downpayment of $3,000,000 from local

businesses to support the project, and now needs to borrow $5,000,000 to complete the project. It therefore decides to issue $5,000,000 of 10.00% ,10 -year bonds. These bonds were issued on January 1, 2018, and pay interest annually on each January 1. The bonds yield 8.00% .

.

Instructions:

"(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2018."

(b) Prepare a bond amortization schedule up to and including January 1, 2021, using the effective interest method.

(c) Assume that on Jan 2, 2021, Venzuela Co. retires half of the bonds at a cost of $3,215,000 plus accrued interest. Prepare the journal entry to record this retirement.

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	10
i=	10%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.46319	$5,000,000	$2,315,967
Interest (Annuity)	6.71008	$500,000	$3,355,041
Price of bonds			$5,671,008

Journal Entries - Venezuela Co
Date	Particulars	Debit	Credit
1-Jan-18	Cash Dr	$5,671,008.00
	To Bond Payable		$5,000,000.00
	To Premium on Bond Payable		$671,008.00
	(To record bond issue)

Solution b:

Bond Amortization Schedule
Date	Interest paid	Interest expense (8%)	Premium Amortized	Unamortized Premium	Carrying Value
1-Jan-18				$671,008	$5,671,008
1-Jan-19	$500,000	$453,680.64	$46,319	$624,689	$5,624,689
1-Jan-20	$500,000	$449,975.09	$50,025	$574,664	$5,574,664
1-Jan-21	$500,000	$445,973.10	$54,027	$520,637	$5,520,637

Solution c:

Journal Entries - Venezuela Co
Date	Particulars	Debit	Credit
2-Jan-21	Bond Payable Dr	$2,500,000.00
	Interest payable Dr	$250,000.00
	Premium on bond payable Dr ($520,637*50%)	$260,319.00
	Loss on retirement of bond Dr	$454,681.00
	To Cash		$3,465,000.00
	(To record bond retirement)