P14-2 (Issuance and Retirement of Bonds) Venezuela Co. is
building a new hockey arena at a cost of $2,500,000. It received a down payment
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, 2013,
and pay interest annually on each January 1. The bonds yield 10%. Venezuela
paid $50,000 in bond issue costs related to the bond sale.
Instructions
(a) Prepare
the journal entry to record the issuance of the bonds and the related bond
issue costs incurred on
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. retires half of the bonds at a cost of
$1,065,000 plus accrued interest. Prepare the journal entry to record this
retirement.
SOLUTION PREVIEW
(a)
|
Present
value of the principal $2,000,000 X
.38554 (PV10, 10%)
|
|
$ 771,080
|
|
|
|
|
|
Present
value of the interest payments
|
|
|
|
$210,000* X 6.14457 (PVOA10, 10%)
|
|
1,290,360
|
File name: P14-2 Venezuela Co.doc File
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