Question

Problem 14-2 (Part Level Submission) Novak Co. is building a new hockey arena at a cost of $2,420,000. It received a downpayment of $540,000 from local businesses to support the project, and now needs to borrow $1,880,000 to complete the project. It therefore decides to issue $1,880,000 of 11%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%. Collapse question part (a) 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 Cash Bonds Payable Premium on Bonds Payable

Answer 1

Amount of bonds to be issued = $1,880,000

Coupon rate of bond = 11%

Market value of bond = Present value of coupon payments + Present value of face value of bond

Annual coupon payment = $1,880,000 * 11% = $206,800

Maturity of bond = 10 years

Number of annual coupon payments = n = 10

Bond yield = r = 10% = 0.10

Issue price of bond = Present value of coupon payments + Present value of face value of bond

Present value of annuity = Annuity amount*{1-(1+r)^-n}/r

Present value of annual coupon payments = $206,800*(1-1.10^-10)/0.10 = $206,800 * 6.14457 = $1,270,697

Present value of face value of bond = $1,880,000/1.10¹⁰ = $721,821

Issue price of bond = $1,270,697 + $721,821 = $1,995,518

Premium on issue of bonds = Issue price – Face value = $1,995,518 - $1,880,000 = $115,518

Date	Account titles and explanation	Debit	Credit
January 1, 2016	Cash	$ 1,995,518.00
	Bonds payable		$ 1,880,000.00
	Premium on issue of bonds		$ 115,518.00
	(To record issue of bonds at premium)