Question

Bonita Co. is building a new hockey arena at a cost of $2,630,000. It received a downpayment of $520,000 from local businesses to support the project, and now needs to borrow $2,110,000 to complete the project. It therefore decides to issue $2,110,000 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%. a-Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

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

Answer 1

a). Present Value of Principal = $2110000 * 0.35218 = $743100

(PV@11% for 10 year = 0.35218)

Present Value of the Interest Payments = ($2110000*12%)*(PVA@11%,10)

= $253200*5.8892

= $1491145

Present Selling Price of the bonds = $743100 + $1491145

=$2234245

Journal Entry :-

Date	Particulars	Debit($)	Credit($)
Jan.1, 2016	Cash a/c Dr.	2234245
	To Bonds Payable		2110000
	To Premium Bonds Payable		124245

b).

Date	Interest Paid	Interest Expense	Premium Amortization	Bond Carring Value
Jan 1, 2016				$2234245
Jan 1, 2017	$253200	$245767	$7433	$2226812
Jan 1, 2018	$253200	$244949	$8251	$2218561
Jan 1, 2019	$253200	$244042	$9158	2209403
Jan 1, 2020	$253200	$243034	$10166	2199237