(Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey arena at a cost of \(2,500,000. It received a downpayment of \)500,000 from local businesses to support the project, and now needs to borrow \(2,000,000 to complete the project. It therefore decides to issue \)2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

(b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method.

(c) Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.

Date

Accounts and Explanation

Debit ($)

Credit ($)

1 Jan 2016

Cash

2,061,450

Bonds payable

2,000,000

Premium on bonds payable

61,450

Particular

Amount $

Present value of bonds $\left(\$2,000,000\times \frac{1}{{\left(1+0.10\right)}^{10}}\right)$

$771,000

Present value of interest payment

$\left(\left(\$2,000,000\times 10.5\%\right)\times \frac{1-\frac{1}{{\left(1+0.10\right)}^{10}}}{\left(0.10\right)}\right)$

$1,290,450

Present value

$2,061,450

Date

Interest payment at the stated rate on face value (10.5%)

Interest expenses at the market rate on the previous year book value (10%)

Amortized premium

Unamortized premium

Bond payable

Book value of bond payable

1 Jan 2016

$61,450

$2,000,000

$2,061,450

1 Jan 2017

$210,000

$206,145

$3,855

57,595

2,000,000

2,057,595

1 Jan 2018

210,000

205,759.5

4,240.5

53,354.5

2,000,000

2,053,354.5

1 Jan 2019

210,000

205,335.45

4,664.55

48,689.95

2,000,000

2,048,689.95

1 Jan 2020

210,000

204,868.995

5,131.005

43,558.945

2,000,000

2,043,558.945

Date

Accounts and Explanation

Debit ($)

Credit ($)

Interest expenses

51,217

Premium on bond payable

$\left(\$5131.005\times \frac{1}{2}\times \frac{1}{2}\right)$

1,283

Interest payable

$\left(\$210,000\times \frac{1}{2}\times \frac{1}{2}\right)$

52,500

Bond payable

1,000,000

Premium on bond payable

23,062

Loss on redemption

41,938

Cash

1,065,000

Particular

Amount $

Carrying amount of 1 Jan 2019

$2,048,689.95

Less: amortization of bond up to June 2019$\left(\frac{\$5131.005}{2}\right)$

(2,565.5025)

Carrying amount on 1 July 2019

$2,046,124.4475

Half of bonds retired$\left(\frac{\$2,046,124.4475}{2}\right)$

$1,023,062.22

Particular

Amount $

Reacquisition price

$1,065,000

Less: Carrying value

($1,023,062.22)

Loss on redemption

($41,937.77)

Particular

Amount $

Carrying value on 1 July 2019

$2,046,124.4475

Less: Par value

(2,000,000)

$46,124.4475

For 6months

$23,062.22