Question

Venezuela Co. is building a new hockey arena at a cost of $2,500,000. It received a down payment of $500,000 from local businesses to support the project, and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of 8%, 10 year bonds. These bonds were issued on January 1, 2014, and pay interest annually on each January 1, starting January 1, 2015. The bonds yield 10%. Venezuela paid $48,000 in bond issue costs related to the bond sale. Instructions a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2014. b) Prepare a bond amortization schedule up to and including January 1, 2018, using the effective interest method. c) Assume that on July 1, 2017, Venezuela Co. redeems half of the bonds at a cost of $980,000 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

(a)Prepare the journal entry to record the issuance of the bonds and the related bond issue costsincurred on January 1, 2014.

Present value of the principal for 10 periods at 10%

Present value of principal formula = $771,087

Present value of an annuity for 10 periods at 10%

Present value of interest formula = $1,290,359

Present selling value of the bonds = $2,061,446

Jan 1, 14 Cash 2,011,446

Unamortized Bond Issue Costs 50,000

Bonds Payable 2,000,000

Premium Bonds Payable 61,446

(b) preparation of bond amortization schedule upto and including january 1, 2017, using the effective interest method

Date Interest paid   Interest expenses Premium amortization Bond carrying value

Jan 1, 14 2061446   

Jan 1, 15 210000 206145     3855 2057590

jan 1, 16 210000 205759 4241 2053349

Jan 1, 17 210000 205335 4665 2048684

Jan 1, 18 210000 204868 5132 2043553

(c)Assume that on July 1, 2017, Venzuela Co. retires half of the bonds at a cost of 1065000 plus accrued interest. preparation of journal entry to record this treatment

Issuance and Retirement of Bonds

Unamortized bond issue costs $50,000

Years of bond issue 10

Unamortized bond issue costs per year $5,000

Unamortized bond issue costs per six months $2,500

Six month periods to July 1, 2017 7

Unamortized bond issue costs to July 1, 2017