Question

Problem 14-2 (Part Level Submission) Ayayai Co. is building a new hockey arena at a cost of $2,420,000. It received a downpayment of $510,000 from local businesses to support the project, and now needs to borrow $1,910,000 to complete the project. It therefore decides to issue $1,910,000 of 10%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 9%.
1.1.1.1 (a)
Your answer is correct. Prepare the journal entry to record the issuance of the bonds on January 1, 2016
1.1.1.2 c)
Your answer is partially correct. Try again.
Assume that on July 1, 2019, Ayayai Co. redeems half of the bonds at a cost of $1,040,600 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

a) First of all we need to calculate the present value of principal and interest due on bonds which is calculated as follows:-

Present value of principal for 10 periods at 9% = Principal amount*PVF(9%,10 years)

= $1,910,000*0.4224 = $806,784

Interest amount = $1,910,000*10% = $191,000

Present Value of an annuity for 10 periods at 9% = Interest amount*PVAF(9%,10 yrs)

= $191,000*6.4177 = $1,225,781

Present value of selling bonds = Present value of Principal + Present value of Interest

= $806,784+$1,225,781 = $2,032,565

Journal entry to record the issuance of the bonds on January 1, 2016 is shown as follows:-   

   Journal Entry (Amount in $)

Date	Account Title	Debit	Credit
Jan. 1, 2016	Cash	2,032,565
	Bonds Payable		1,910,000
	Premium on Bonds payable(2,032,565-1,910,000)		122,565

c) In this part, firstly we need to calculate the carrying value of bonds being retired on July 1, 2019 which is shown as follows:- (Amount in $)

Date	Interest paid (A)	Interest Expense (B)	Premium Amortization (A-B)	Bond Carrying value
1/1/16				2,032,565
1/1/17	191,000	(2,032,565*9%) = 182,931	8,069	(2,032,565-8,069) = 2,024,496
1/1/18	191,000	(2,024,496*9%) = 182,205	8,795	(2,024,496-8,795) = 2,015,701
1/1/19	191,000	(2,015,701*9%) = 181,413	9,587	(2,015,701-9,587) = 2,006,114

Percentage of bonds to be retired in the year = 50%

Carrying value of the bonds to be retired as on january 1, 2019 = 50% of $2,006,114 = $1,003,057

Interest on bonds to be retired as on July 1, 2019 = ($1,910,000*50%)*10%*6/12 = $47,750

Interest expense for retired bonds as on July 1, 2019 = $1,003,057*9%*6/12 = 45,138

Premium amortization for retired Bonds = $47,750 - $45,138 = $2,612

Carrying value of retired bonds as on July 1, 2019 = $1,003,057-$2,612 = $1,000,445

Reacquisition price = $1,040,600

Loss on redemption of bonds = Reacquisition price - Carrying value of retired bonds as on July 1, 2019

= $1,040,600 - $1,000,445 = $40,155

Journal Entries (Amount in $)

Date	Account Title	Debit	Credit
July 1, 2019	Interest Expense	45,138
	Premium on Bonds payable	2,612
	Cash		47,750
	(To record the payment of accrued interest on retired bonds)
July 1, 2019	Bonds Payable ($1,910,000*50%)	955,000
	Premium on bonds payable (Bal.fig)	45,445
	Loss on redemption of bonds	40,155
	Cash		1,040,600
	(To record the redemption of bonds)

Premium on Bonds payable remaining unamortized on July 1, 2019 can be calculated as follows:-

Premium on Bonds Payable balance as on January 1, 2019 = $122,565-$8,069-$8,795-$9,587

= $96,114

Unamortized premium on bonds as on Jan. 1, 2019 for retired bonds = 50% of $96,114 = $48,057

Unamortized premium on bonds as on July. 1, 2019 = $48,057 - $2,612 = $45,445