Problem 14-2 Venezuela Co. is building a new hockey arena at a cost of $2,660,00
ID: 2493909 • Letter: P
Question
Problem 14-2
Venezuela Co. is building a new hockey arena at a cost of $2,660,000. It received a downpayment of $513,000 from local businesses to support the project, and now needs to borrow $2,147,000 to complete the project. It therefore decides to issue $2,147,000 of 11%, 10 year bonds. These bonds were issued on January 1, 2013, and pay interest annually on each January 1. The bonds yield 10%. Venezuela paid $56,800 in bond issue costs related to the bond sale.
(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2013. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
January 1, 2013
(b) Prepare a bond amortization schedule up to and including January 1, 2017, using the effective interest method. (Round answers to 0 decimal places, e.g. 38,548.)
Date
Cash
Paid
Interest
Expense
Premium
Amortization
Carrying
Amount of
Bonds
(c) Assume that on July 1, 2016, Venezuela Co. redeems half of the bonds at a cost of $1,143,800 plus accrued interest. Prepare the journal entry to record this redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
July 1, 2016
(To record interest.)
July 1, 2016
(To record reacquisition.)
Date
Account Titles and Explanation
Debit
Credit
January 1, 2013
Explanation / Answer
Answer:
Present Value of the principal for 10 periods at 10%.
Present value of principal formula = $ 771,087
present value of annuity for 10 periods at 10%
Present value of interest formula.......................................= $ 1,290,359
Present selling value of the bonds....................................= $ 2,061,446
Journal entry..
Jan1, 2013
Cash.........................................................................................Dr. $ 2,011,446
Umamortized Bond Issue Costs.........................................Dr. $ 50,000
Bond Payable.............................................................................$ 2,000,000
Premium Bonds Payable.........................................................$ 61,446
b) Bond amortization Schedule
Date Int. Paid Int. Expense Premium Amortization Bond Carrying
Jan 1,2013 $ 2,061,446
Jan1,2014 $ 210,000 $ 206,145 $ 3,855 $ 2,057,590
Jan1,2015 $ 210,000 $ 205,759 $ 4,241 $ 2,053,349
Jan1,2016 $ 210,000 $ 205,335 $ 4,665 $ 2,048,684
Jan1,2017 $ 210,000 $ 204,868 $ 5,132 $ 2,043,553
C.) Carrying amount as of Jan 1,2016 ....................................................$ 2,048,676
Less: Amortization of Bond Premium
( 5,132 / 2 ) 2,566
Carrying amount as of 7/1/2016 $ 2,046,110
Reacquisition Price ................................................................................... $ 1,065,000
Carrying amount as of 7/1/2016
( 2,046,110 / 2 ) ( 1.023,055 )
$ 41,945
Unamortized Bond Issue Cost
( 35,000 / 2) $ 16,250
Loss................................................................................................................ $ 58,195
Journal Entry for Accrued Interest
7/1/2016
Interest Expense.......................................................................... Dr. $ 51,216
Premium of Bond Payable..........................................................Dr. $ 1,283
( 5,132 * 1/2 * 1/2 ) = $ 1,283
Cash.................................................................................................. $ 52,500
( 210,000 * 1/2 * 1/2 ) = 52,500