Question

Problem 14-4

Tamarisk Inc. is building a new hockey arena at a cost of $2,850,000. It received a down payment of $570,000 from local businesses to support the project, and now needs to borrow $2,280,000 to complete the project. It therefore decides to issue $2,280,000 of 10-year, 10.50% bonds. These bonds were issued on January 1, 2017 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. Tamarisk Inc. paid and capitalized $57,000 in bond issuance costs related to the bond issue. Tamarisk prepares financial statements in accordance with IFRS.

a) Using time value of money tables, a financial calculator, and computer spreadsheet functions, calculate the value of the bonds and prepare the journal entry to record the issuance of the bonds on January 1, 2017. (For the journal entry, use the amount arrived at using the time value of money tables.) (For calculation purposes, use 5 decimal places as displayed in the factor table provided and final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

b) Prepare a bond amortization schedule up to and including January 1, 2022 using the effective interest method. (Round answers to 0 decimal places, e.g. 5,275.)

c) Assume that on July 1, 2020, the company retires half of the bonds at a cost of $1,214,000 plus accrued interest. Prepare the journal entries to record this retirement. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

(a)	Present value of the principal
	$2,280,000 X .38554 (PV10, 10%).......................		$   879,031
	Present value of the interest payments
	$239,400* X 6.14457 (PVOA10, 10%).................		1,471,010
	Present value (selling price of the bonds).....		$2,350,041

          *$2,280,000 X 10.5% = $239,400

	Cash............................................................................ .....................................................................................	2,293,041
	Unamortized Bond Issue Costs............................	57,000
	Bonds Payable................................................		2,280,000
	Premium Bonds Payable..............................		70,041

(b)	Date				Cash Paid				Interest Expense				Premium Amortization				Carrying Amount of Bonds
	1/1/17															$2,350,041
	1/1/18			$239,400				$235,004				$4,396				2,345,645
	1/1/19			239,400				234,565				4,835				2,340,810
	1/1/20			239,400				234,081				5,319				2,335,491
	1/1/21			239,400				233,550				5,850				2,329,641

(c)	Carrying amount as of 1/1/20..............................		$2,335,491
	Less: Amortization of bond premium
	(5,850 ÷ 2)....................................................		2,925
	Carrying amount as of 7/1/20..............................		$2,332,566

	Reacquisition price...............................................		$1,214,000
	Carrying amount as of 7/1/20
	($2,332,566 ÷ 2)...................................................		(1,166,283)
			47,717
	Unamortized bond issue costs ($37,050 ÷ 2)..		18,525
	Loss on redemption of bonds............................ ..................................................................................		$     66,242

	Entry for accrued interest
	Interest Expense................................................	58,388
	Premium on Bonds Payable
	($5,850 X 1/2 X 1/2).........................................	1,462
	Cash
	($239,400 X 1/2 X 1/2)...........................		59,850

	Entry for reacquisition
	Bonds Payable...................................................	1,140,000
	Premium on Bonds Payable............................	26,283*
	Loss on Redemption of Bonds ......................	66,242
	Unamortized Bond Issue Costs............		18,525**
	Cash............................................................		1,214,000
	*Premium as of 7/1/20 to be written off
	($2,332,566 – $2,280,000) X 1/2 = $26,283
	**($57,000 X 1/2) ÷ 10 = $2,850 per year
	$2,850 X 3.5 = $9,975
	Remaining Balance: $28,500 – $9,975 = $18,525 on 1/2 Bonds

The loss is reported as an ordinary loss.