Problem 14-2 (Part Level Submission) Sandhill Co. is building a new hockey arena
ID: 2579588 • Letter: P
Question
Problem 14-2 (Part Level Submission)
Sandhill Co. is building a new hockey arena at a cost of $2,750,000. It received a downpayment of $350,000 from local businesses to support the project, and now needs to borrow $2,400,000 to complete the project. It therefore decides to issue $2,400,000 of 10%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 9%.
Prepare a bond amortization schedule up to and including January 1, 2020, 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
1/1/16 . $ $ $ $
1/1/17
1/1/18
1/1/19
1/1/20
Explanation / Answer
Bond issue price = coupon * PVIFA (yield rate , n) + Par value * PVIF (yield rate, n)
= ($2400000 * 10%) * PVIFA (9%, 10) + $2400000 * PVIF (9%, 10)
= 240000 * 6.4177 + $2400000 * 0.4224 = $2,554,008
Premium on the issue of the bonds = $2554008 - 2400000 = $154008
Amortisation schedule :
Date of Bond Cash paid (A) Interest Expense (9% of Previous carrying amount) (B) Premium Amortisation (A-B) Carrying Amount $ 1/1/16 154008 2554008 1/1/17 240000 2554008*9%= 229861 (10139) 2543869 1/1/18 240000 2543869*9% = 228948 (11052) 2532817 1/1/19 240000 227954 (12046) 2520771 1/1/20 240000 226869 (13131) 2507640