Vaughn Co. is building a new hockey arena at a cost of $2,630,000. It received a
ID: 2537723 • Letter: V
Question
Vaughn Co. is building a new hockey arena at a cost of $2,630,000. It received a downpayment of $520,000 from local businesses to support the project, and now needs to borrow $2,110,000 to complete the project. It therefore decides to issue $2,110,000 of 12%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 11%.
Date
Account Titles and Explanation
Debit
Credit
January 1, 2016
Vaughn Co. is building a new hockey arena at a cost of $2,630,000. It received a downpayment of $520,000 from local businesses to support the project, and now needs to borrow $2,110,000 to complete the project. It therefore decides to issue $2,110,000 of 12%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 11%.
Explanation / Answer
Calculation of issue price of bond Issue price of bond = Present value of all future coupon payments + Present value of Bond Maturity value We are using bond yield 11% as a discount rate to calculate the present values. We can use present value of annuity formula to calculate the present value of all future coupon payments. Present value of annuity = P*{[1 - (1+r)^-n]/r} Present value of annuity = present value of coupon payments = ? P = Yearly coupon payment = $21,10,000 * 12% = $2,53,200 r = discount rate per year = 11% n = no.of years = 10 Present value of annuity = 253200*{[1 - (1+0.11)^-10]/0.11} Present value of annuity = 253200*5.889232 = 14,91,153.55 Present value of all future coupon payments = $14,91,153.55 Present value of bond maturity value = Bond maturity value * Discount factor of 10th year @ 11% Present value of bond maturity value = $21,10,000 * [1/1.11^10] = $7,43,109.25 Issue price of bond = $14,91,153.55 + $7,43,109.25 = $22,34,262.80 The journal entry to record the issuance of the bonds on January 1, 2016 Date General Journal Debit Credit Jan.1,2016 Cash $2,234,262.80 Bond Payable $2,110,000.00 Premium on Bonds Payable $124,262.80
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