14. Venezuela Co. is building a new hockey arena at a cost of $2,509,000. It rec

Question

14. Venezuela Co. is building a new hockey arena at a cost of $2,509,000. It received a downpayment of $501,800 from local businesses to support the project, and now needs to borrow $2,007,200 to complete the project. It therefore decides to issue $2,007,200 of 12%, 10 year bonds. These bonds were issued on January 1, 2013, and pay interest annually on each January 1. The bonds yield 11%. Venezuela paid $55,000 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.

Date: Account titles Debit Credit
January 1,2013 ____________ _______ _________
   ____________ _______ _________
   ____________ _______ __________
   ____________ ________ ___________

b) Prepare a bond amortization schedule up to and including January 1, 2017, using the effective interest method.

c) assume that on July 1,2016, Venezuela Co. redeems half of the bonds at a cost of $1,078,870 plus accrued interest. Prepare the journal entry to record this redepmtion.
Date: Account titles Debit Credit
July 1,2016 ____________ _______ _______
   ____________ ________ _______
   ____________ ________ _______
   _____________ ________ _________
   _____________ _________ _________
(to record interest)
July 1, 2016 ______________ __________ __________
   ______________ _________ _________
   ______________ __________ _________
   _______________ __________ ________
   _____________ ___________ _________
   (to record reacquisition)

Date Cash Paid Interest Expense Premium Amortization Carrying amount of bond 1/1/13 1/1/14 1/1/15 1/1/16 1/1/17

Explanation / Answer

Issue price of bonds = ($ 2,007,200 x 12%) x PVIFAi= 11%, n=10 + 2,007,200 x PVIFi=11%, n=10 = $ 240,864 x 5.889 + $ 2,007,200 x 0.352 = $ 1,418,448 + $ 706,534 = $ 2,124,982

Net proceeds from the bond issue = $ 2,124,982 - $ 55,000 = $ 2,069,982

a. Journal entries for issuance of bonds:

b. Bond amortizaion schedule using effective interest method:

c.

Date Account Titles Debit Credit $ $ January 1, 2013 Cash 2,069,982 Bond issue costs 55,000 Bonds payable 2,007,200 Premium on bonds payable 117,782

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