Problem 14-4 Tamarisk Inc. is building a new hockey arena at a cost of $2,850,00
ID: 2611729 • Letter: P
Question
Problem 14-4 Tamarisk Inc. is building a new hockey arena at a cost of $2,850,000. It received a down payment of $570,000 from local businesses to support the project, and now needs to borrow $2,280,000 to complete the project. It therefore decides to issue $2,280,000 of 10-year, 10.50% bonds. These bonds were issued on January 1, 2017 and pay interest annually on each January 1, The bonds yield 10% to the investor and have an effective interest rate to the issuer of 10.4053%. (There is an increased effective interest rate due to the capitalization of the bond issue costs.) Any additional funds that are needed to complete the project will be obtained from local businesses. Tamarisk Inc. paid and capitalized $57,000 in bond issuance costs related to the bond issue. Tamarisk prepares financial statements in accordance with IFRS Click here to view the factor table. Using time value of money tables, a financial calculator, and computer spreadsheet functions, calculate the value of the bonds and prepare the journal entry to record the issuance of the bonds on January 1, 2017. (For the journal entry, use the amount arrived at using the time value of money tables.) (For calculation purposes, use 5 decimal places as displayed in the factor table provided and final answers to O decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select No Entry for the account tities and enter O for the amounts.) Prepare a bond amortization schedule up to and including January 1, 2022 using the effective interest method. (Round answers to O decimal places, e.g. S,275.) Assume that on July 1, 2020, the company retires half of the bonds at a cost of $1,214,000 plus accrued interest. Prepare the journal entries to record this retirement. (Round answer to O decimal places, e.g 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter 0 for theExplanation / Answer
Face value of bond
2280000
Interest
239400
Year
Interest
Principal
PV factor @10.5%
Present value
0
239400
1
239400
1
239400
0.90498
216652
2
239400
0.81898
196065
3
239400
0.74116
177434
4
239400
0.67073
160574
5
239400
0.607
145316
6
239400
0.54932
131507
7
239400
0.49712
119011
8
239400
0.44989
107703
9
239400
0.40714
97468.4
10
2280000
0.36845
840063
Value of the bond
2431193
Journal entries
Date
Particulars
Debit ($)
Credit ($)
01-Jan-17
Bank A/c
2280000
Discount on bond
151193
To, 10.50% Bond
2431193
(Being 10.5% bond issued)
Year
Interest
Principal
PV factor @10.5%
Present value
0
239400
1
239400
1
239400
0.90575
216837
2
239400
0.82039
196401
3
239400
0.74307
177891
4
239400
0.67304
161126
5
239400
0.60961
145940
6
239400
0.55215
132186
7
239400
0.50012
119728
8
239400
0.45298
108444
9
239400
0.41029
98223.4
10
2280000
0.37162
847297
Value of the bond
7.03902
2443473
Discount on bond
163473
Date
Cash payment
Interest
Discount amortization
Carrying amount of bond
01-01-17
239400
239400
16347.3
2427126
01-01-18
239400
239400
16347.3
2410778
01-01-19
239400
239400
16347.3
2394431
01-01-20
239400
239400
16347.3
2378084
01-01-21
239400
239400
16347.3
2361737
01-01-22
239400
239400
16347.3
2345389
Journal entries
Date
Particulars
Debit ($)
Credit ($)
10.5% Bond
1189042
Interest
119700
Bank
1333700
(being bond repaid)
Profit and loss A/c
168742
Interest
119700
Discount on bond
49041.9
(being discount and interest adjusted against profit and loss
Face value of bond
2280000
Interest
239400
Year
Interest
Principal
PV factor @10.5%
Present value
0
239400
1
239400
1
239400
0.90498
216652
2
239400
0.81898
196065
3
239400
0.74116
177434
4
239400
0.67073
160574
5
239400
0.607
145316
6
239400
0.54932
131507
7
239400
0.49712
119011
8
239400
0.44989
107703
9
239400
0.40714
97468.4
10
2280000
0.36845
840063
Value of the bond
2431193
Journal entries
Date
Particulars
Debit ($)
Credit ($)
01-Jan-17
Bank A/c
2280000
Discount on bond
151193
To, 10.50% Bond
2431193
(Being 10.5% bond issued)