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Chapter 14: Q2P (page 760)

(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.

Short Answer

Expert verified
  1. Journal entry record debit to cash, credit to bonds payable, and premium on bond payable.
  2. The bond's book value payable on 1 January 2020 is $2,043,559.
  3. The business entity will incur a loss of $41,938on redemption.

Step by step solution

01

Definition of Interest Payable

Interest payable can be defined as the interest expenses that are incurred by the business entity but are not paid to the creditor. These are reported under current liabilities by the business entity

02

Journal entry for the issuance

Date

Accounts and Explanation

Debit ($)

Credit ($)

1 Jan 2016

Cash

2,061,450

Bonds payable

2,000,000

Premium on bonds payable

61,450

Working note:

Particular

Amount $

Present value of bonds ($2,000,000脳11+0.1010)

$771,000

Present value of interest payment

($2,000,000脳10.5%脳1-11+0.10100.10)

$1,290,450

Present value

$2,061,450

03

Bond amortization schedule

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

04

Journal entry to record the redemption

Date

Accounts and Explanation

Debit ($)

Credit ($)

Entry for accrual

Interest expenses

51,217

Premium on bond payable

($5131.005脳12脳12)

1,283

Interest payable

($210,000脳12脳12)

52,500

Entry for reacquisition

Bond payable

1,000,000

Premium on bond payable

23,062

Loss on redemption

41,938

Cash

1,065,000

Working note:

Calculation of loss on redemption:

Particular

Amount $

Carrying amount of 1 Jan 2019

$2,048,689.95

Less: amortization of bond up to June 2019($5131.0052)

(2,565.5025)

Carrying amount on 1 July 2019

$2,046,124.4475

Half of bonds retired($2,046,124.44752)

$1,023,062.22

Calculation of gain or loss on redemption:

Particular

Amount $

Reacquisition price

$1,065,000

Less: Carrying value

($1,023,062.22)

Loss on redemption

($41,937.77)

Calculation of premium written off:

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

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Most popular questions from this chapter

(Amortization Schedule鈥擡ffective-Interest) Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)

Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:

  1. expensed in the period when the debt is issued.
  2. recorded as a reduction in the carrying value of bonds payable.
  3. accumulated in a deferred charge account and amortized over the life of the bonds.

d.reported as an expense in the period the bonds mature or are redeemed.

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
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