Problem 14-2 (Part Level Submission) Larkspur Co. is building a new hockey arena
ID: 2430430 • Letter: P
Question
Problem 14-2 (Part Level Submission)
Larkspur Co. is building a new hockey arena at a cost of $2,430,000. It received a downpayment of $490,000 from local businesses to support the project, and now needs to borrow $1,940,000 to complete the project. It therefore decides to issue $1,940,000 of 11%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.
(a)
Date
Account Titles and Explanation
Debit
Credit
January 1, 2016
Problem 14-2 (Part Level Submission)
Larkspur Co. is building a new hockey arena at a cost of $2,430,000. It received a downpayment of $490,000 from local businesses to support the project, and now needs to borrow $1,940,000 to complete the project. It therefore decides to issue $1,940,000 of 11%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.
Explanation / Answer
Present value of principal (PV of $1 @ 10% interest and n = 10 is 0.38554) = 1,940,000 * 0.38554 = 747,947.6
Present value of annuity of annual interest payments of of 11% of $1,940,000 (PV of annuity @ 10% and n = 10 is 6.14457) = 213,400 * 6.14457 = 1,311,251.238
Carrying value of the bond = 747,947.6 + 1,311,251.238 = 2,059,198.838 (rounded off to 2,059,199)
Premium on bonds = 2,059,198.838 - 1,940,000 = 119,198.838 (rounded off to 119,199)
Cash 2,059,199 Bonds payable 1,940,000 Bonds premium 119,199