Question

Tamarisk 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%.

1. Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

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

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

Answer 1

Requirement 1: Prepare the following journal entry

Date	Account Title and Explanation	Debit	Credit
Jan 1	Cash	$2,266,019
2016	Premium on Bonds Payable		$126,019
	12% Bonds Payable		$2,140,000
	To record 12% bonds payable issued

Notes:

Present value of the principal
$2,140,000 × 0.35218 (PV 10, 11%)	$753,665
Present value of the interest payments
($2,140,000 × 12%) × 5.88923 (PVOA 10, 11%)	$1,512,354
Present value of bonds	$2,266,019

Requirement 2: Prepare a bond amortization schedule as follows

Date	Cash Paid	Interest Expense	Premium Amortization	Outstanding Balance
Jan 1, 2016				$2,266,019
Jan 1, 2017	$256,800	$249,262	$7,538	$2,258,482
Jan 1, 2018	$256,800	$248,433	$8,367	$2,250,115
Jan 1, 2019	$256,800	$247,513	$9,287	$2,240,827
Jan 1, 2020	$256,800	$246,491	$10,309	$2,230,518

Note: 2017 interest expense = $7,538 (2,266,019 × 11%)

2018 interest expense = $8,367 (2,258,482 × 11%) and so on.

Cash paid = $256,800 (2,140,000 × 12%)

Requirement 3: Prepare the following journal entry to record redemption of bonds

Date	Account Title and Explanation	Debit	Credit
July 1	Interest Expense ($246,491 × 1 ÷ 2 × 6 ÷12)	$61,623
2019	Premium on Bonds Payable ($10,309 × 1 ÷ 2 × 6 ÷12)	$2,577
	Cash ($256,800 × 1 ÷ 2 × 6 ÷12)		$64,200
	To record accrued interest expense
July 1	12% Bonds Payable	$1,070,000
2019	Premium on Bonds Payable	$47,836
	Loss on Redemption of Bonds	$56,064
	Cash		$1,173,900
	To record redemption of bonds

Notes:

Outstanding balance Jan 1, 2019	$2,240,827
Less: Amortization of bonds premium ($10,309 ÷ 2)	$5,155
Carrying amount of bond as of July 1, 2019	$2,235,673
Bond acquisition price	$1,173,900
Less: Carrying amount of bonds ($2,235,672.68 ÷ 2)	$1,117,836
Loss on redemption of bonds	$56,064

Unamortized premium on bonds = $47,836 (($2,235,673 − $2,140,000) ÷ 2)