Crane Co. is building a new hockey arena at a cost of $2,550,000. It received a
ID: 2527284 • Letter: C
Question
Crane Co. is building a new hockey arena at a cost of $2,550,000. It received a downpayment of $450,000 from local businesses to support the project, and now needs to borrow $2,100,000 to complete the project. It therefore decides to issue $2,100,000 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
Crane Co. is building a new hockey arena at a cost of $2,550,000. It received a downpayment of $450,000 from local businesses to support the project, and now needs to borrow $2,100,000 to complete the project. It therefore decides to issue $2,100,000 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
SOLUTION
Present value of the principal = $2,100,000 * 0.38554 = $809,634
(PV of $1 for 10 periods at 10%) = 0.38554
Present value of the interest = 231,000 * 6.14457 = $1,419,396
Present selling value of the bonds = $809,634 + $1,419,396 = $2,229,030
Journal Entry
Date Account titles and Explanation Debit ($) Credit ($) January 1, 2016 Cash 2,229,030 Bonds Payable 2,100,000 Premium on Bonds Payable 129,030