Homework SourseMarigold Co is building a new hockey arena at a cost of 2600
Marigold Co. is building a new hockey arena at a cost of $2,600,000. It received a downpayment of $460,000 from local businesses to support the project, and now needs to borrow $2,140,000 to complete the project. It therefore decides to issue $2,140,000 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%.
Prepare the journal entry to record the issuance of the bonds on January 1, 2016. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
January 1, 2016
Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method.
CHART HEADINGS SHOULD CONTAIN THE FOLLOWING :Date Cash Paid Interest Expense Premium Amortization Carrying Amount of Bonds
1/1/2016
1/1/2017
1/1/2018
1/1/2019
1/1/20
Assume that on July 1, 2019, Marigold Co. redeems half of the bonds at a cost of $1,126,600 plus accrued interest. Prepare the journal entry to record this redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
July 1, 2019
(To record interest)
July 1, 2019
(To record reacquisition)
| Date | Account Titles and Explanation | Debit | Credit |
| January 1, 2016 |
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| Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. CHART HEADINGS SHOULD CONTAIN THE FOLLOWING :Date Cash Paid Interest Expense Premium Amortization Carrying Amount of Bonds 1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/20 |
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Solution
(a)
Present value of the principal
$2,140,000 X .35218 (PV10, 11%).......................
$ 753,665
Present value of the interest payments
$256,800* X 5.88923 (PVOA10, 11%).................
1,512,354
Present value (selling price of the bonds).....
$2,266,019
*$2,140,000 X 12.0% = $256,800
Cash............................................................................ .....................................................................................
2,266,019
Bonds Payable................................................
2,140,000
Premium Bonds Payable..............................
126,019
(b)
Date
Cash Paid
Interest Expense
Premium Amortization
Carrying Amount of Bonds
1/1/16
$2,266,019
1/1/17
$256,800
$249,262
$7,538
2,258,481
1/1/18
256,800
248,433
8,367
2,250,114
1/1/19
256,800
247,513
9,287
2,240,827
1/1/20
256,800
246,491
10,309
2,230,518
(c)
Carrying amount as of 1/1/19..............................
$2,240,827
Less: Amortization of bond premium
(10,309 ÷ 2)..................................................
5,155
Carrying amount as of 7/1/19..............................
$2,235,672
Reacquisition price...............................................
$1,126,600
Carrying amount as of 7/1/19
($2,235,672 ÷ 2)...................................................
(1,117,836)
Loss on redemption of bonds............................ ..................................................................................
$ 8,764
Entry for accrued interest
Interest Expense................................................
61,623
Premium on Bonds Payable
($10,309 X 1/2 X 1/2).......................................
2,577
Cash
($256,800 X 1/2 X 1/2)...........................
64,200
Entry for reacquisition
Bonds Payable...................................................
1,070,000
Premium on Bonds Payable............................
47,836*
Loss on Redemption of Bonds ......................
8,764
Cash............................................................
1,126,600
*Premium as of 7/1/19 to be written off
($2,235,672 – $2,140,000) X 1/2 = $47,836
The loss is reported as an ordinary loss.
| (a) | Present value of the principal | ||
| $2,140,000 X .35218 (PV10, 11%)....................... | $ 753,665 | ||
| Present value of the interest payments | |||
| $256,800* X 5.88923 (PVOA10, 11%)................. | 1,512,354 | ||
| Present value (selling price of the bonds)..... | $2,266,019 |
