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 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Instructions

(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.

(c) Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

Table values are based on:
n=	10
i=	10.5%
Cash Flow	Amount	Present Value
Interest	$2,000,000*10.5% =$210,000	$210,000*PVAF(10%,10) =$210,000*6.14457 =$1,290,358
Principal	$2,000,000	$2,000,000*PVIF(10%,10) =$2,000,000*0.38554 =$771,080
Price of Bonds		$2,061,438
Premium on bonds =$2,061,438 - $2,000,000 =$61,438
Amortization table
Date	Interest Payment	Interest expenses	Premium amorrtization	Bond carrying amount
01-Jan-16				20,61,438
01-Jan-17	2,10,000	2,06,144	3,856	20,57,582
01-Jan-18	2,10,000	2,05,758	4,242	20,53,340
01-Jan-19	2,10,000	2,05,334	4,666	20,48,674
01-Jan-20	2,10,000	2,04,867	5,133	20,43,541
01-Jan-21	2,10,000	2,04,354	5,646	20,37,896
01-Jan-22	2,10,000	2,03,790	6,210	20,31,685
01-Jan-23	2,10,000	2,03,169	6,831	20,24,854
01-Jan-24	2,10,000	2,02,485	7,515	20,17,339
01-Jan-25	2,10,000	2,01,734	8,266	20,09,073
01-Jan-26	2,10,000	2,00,907	9,073	20,00,000