Name: Solution

Problem: P14-2, Issuance and Retirement of Bonds

Course:
Date:
Venzuela 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 10.50% 10 -year bonds. These bonds were issued on January 1, 2009,
and pay interest annually on each January 1. The bonds yield 10.00% Venzuela paid
$50,000 in bond issue costs related to the bond sale.

Note: Use of tables or financial calculators may result is slightly different values due to rounding and
significant digits.

Instructions:
(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs
incurred on January 1, 2009.

Present value of the principal for 10 periods at 10%

Present value of principal formula = $771,087

Present value of an annuity for 10 periods at 10%

Present value of interest formula = $1,290,359

Present selling value of the bonds = $2,061,446

Jan 1, 09 Cash 2,011,446

Unamortized Bond Issue Costs 50,000
Bonds Payable 2,000,000
Premium Bonds Payable 61,446

(b) Prepare a bond amortization schedule up to and including January 1, 2013, using the effective
interest method.

Bond
Interest Interest Premium
Date Carrying
Paid Expense Amortization
Value
Jan 1, 09 $2,061,446
Jan 1, 10 $210,000 $206,145 $3,855 2,057,590
Jan 1, 11 210,000 205,759 4,241 2,053,349
Jan 1, 12 210,000 205,335 4,665 2,048,684
Jan 1, 13 210,000 204,868 5,132 2,043,553

(c) Assume that on July 1, 2012, Venzuela Co. retires half of the bonds at a cost of $1,065,000
plus accrued interest. Prepare the journal entry to record this retirement.

Problem 14-2 Solution, Page 1 of 8, 04/02/2020, 17:01:10

Name: Solution
Problem: P14-2, Issuance and Retirement of Bonds
Course:
Date:
Hint: Resolve value of unamortized bond issue costs for the bonds being retired.
Unamortized bond issue costs $50,000
Years of bond issue 10
Unamortized bond issue costs per year $5,000
Unamortized bond issue costs per six months $2,500
Six month periods to July 1, 2012 7
Unamortized bond issue costs to July 1, 2012 $17,500
Remaining unamortorized bond issue costs as of July 1, 2012 $32,500
Bonds retired as a percentage of bonds issued 50%
Value of remaining unamortized bond issue costs to retired bonds $16,250

Hint: Resolve carrying value of the bonds being retired.

Bond
Interest Interest Premium
Date Carrying
Paid Expense Amortization
Value
Jan 1, 09 $2,061,446
Jan 1, 10 $210,000 $206,145 $3,855 2,057,590
Jan 1, 11 210,000 205,759 4,241 2,053,349
Jan 1, 12 210,000 205,335 4,665 2,048,684
Percentage of bonds to be retired in the year 50%
Carrying value on Jan 1, 2012 of the bonds to be retired 1,024,342
Interest on bonds to be retired as of July 1, 2012
Jul 1, 12 52,500 51,217 1,283 1,023,059

Reacquisition price $1,065,000

Carrying value as of July 1, 2012 1,023,059
41,941
Unamortized bond issue costs 16,250
Loss $58,191

Entry for accrued interest

Interest Expense [1,024,342 * 10.00% * (6/12)] 51,217
Premium on Bonds Payable 1,283
Cash [$1,000,000*10.50%*(6/12)] 52,500

Entry for reacquisition

Bonds Payable ($2,000,000 * 50%) 1,000,000
Premium on Bonds Payable 23,059
Loss on Redemption of Bonds 58,191
Unamortized Bond Issue Costs 16,250
Cash 1,065,000

The loss is reported as an ordinary loss.

Problem 14-2 Solution, Page 2 of 8, 04/02/2020, 17:01:10

Name: Solution
Problem: P14-5, Comprehensive Bond Problem
Course:
Date:

Instructions: (Round to the nearest dollar.)

(Note: Calculations with financial calculators or tables might result in slightly different values due
to rounding.)
In each of the following independent cases the company closes its books on December 31.
For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective
interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premiu
or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

1. Sanford Co. sells $500,000 of 10% bonds on March 1, 2010. The

bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2013.
The bonds yield 12% Give the entries through December 31, 2011.

Mar 1, 10 Cash 472,088

Discount on Bonds Payable 27,912
Bonds Payable

Maturity value of bonds payable $500,000

Present value of $500,000 due in 7 periods at 6% 332,529
Present value of interest payable semiannually 139,560
Proceeds from sale of bonds 472,088
Discount on bonds payable $27,912

Sep 1, 10 Interest Expense 28,325

Discount on Bonds Payable
Cash [$500,000 * 10% * (6/12)]

Dec 31, 10 Interest Expense 19,017

Discount on Bonds Payable [$3,525*(4 mos/6 mos)]
Interest Payable [$500,000 * 10% * (4 mos / 12 mos)]
Note: Amortization table is semi-annual, interest rate is stated as annual value.

Mar 1, 11 Interest Expense 9,508

Interest Payable 16,667
Discount on Bonds Payable [$3,525*(2 mos/6 mos)]
Cash [$500,000 * 10% * (6/12)]

Sep 1, 11 Interest Expense 28,736

Discount on Bonds Payable
Cash

Dec 31, 11 Interest Expense 19,307

Discount on Bonds Payable [$3,960*(4 mos/6 mos)]
Interest Payable [$500,000 * 10% * (4 mos / 12 mos)]
 Schedule of Bond Discount Amortization
Effective Interest Method
10% Bonds Sold to Yield 12%
Carrying
Cash Interest Bond
Date Value
Paid Expense Discount
of Bonds
Mar 1, 10 472,088
Sep 1, 10 25,000 28,325 3,325 475,413
Mar 1, 11 25,000 28,525 3,525 478,938
Sep 1, 11 25,000 28,736 3,736 482,674
Mar 1, 12 25,000 28,960 3,960 486,635
Sep 1, 12 25,000 29,198 4,198 490,833
Mar 1, 13 25,000 29,450 4,450 495,283
Sep 1, 13 25,000 29,717 4,717 500,000

2. Titania Co. sells $400,000 of 12% bonds on June 1, 2010. The

bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2014. The bonds
yield 10% On October 1, 2011, Titania buys back
worth of the bonds for $126,000 (includes accrued interest). Give the entries through
December 31, 2012.
Jun 1, 10 Cash 425,853
Bonds Payable
Premium on Bonds Payable

Maturity value of bonds payable $400,000

Present value of $400,000 due in 8 periods at 5% 270,736
Present value of interest payable semiannually 155,117
Proceeds from sale of bonds 425,853
Premium on bonds payable $25,853

Dec 1, 10 Interest Expense 21,293

Premium on Bonds Payable 2,707
Cash [$400,000 * 12.00% * (6/12)]
Note: Amortization table is semi-annual, interest rate is stated as annual value.

Dec 31, 10 Interest Expense [$21,157 * (1 mo / 6 mos)] 3,526

Premium on Bonds Payable [$2,843 * (1/6)] 474
Interest Payable [$400,000 * 12.00% * (4/12)]

Jun 1, 11 Interest Expense [$21,157 * (5 mos / 6 mos)] 17,631

Interest Payable [$400,000 * 12.00% * (4/12)] 4,000
Premium on Bonds Payable [$2,843 * (5/6)] 2,369
Cash [$400,000 * 12% * (5 mos/12 mos)]

Oct 1, 11 Interest Expense [$21,015 * 0.30 * (4/6)] 4,203

Premium on Bonds Payable [$2,985 * 0.30 * (4/6)] 597
Cash [$400,000 * 0.30 * 12% * (4 mos/12 mos)]

Oct 1, 11 Bonds Payable 120,000

Premium on Bonds Payable [$20,303 * 0.30 - $597) 5,494
Gain on Redemption of Bonds Payable
Cash [$400,000 * 0.30 * 12% * (4 mos/12 mos)]
 Net carrying amount of bonds redeemed - Par value 120,000
Unamortized premium 5,494
125,494
Reacquisition price 121,200
Gain on redemption $4,294

Dec 1, 11 Interest Expense ($21,015 * 0.70) 14,711

Premium on Bonds Payable ($2,985 * 0.70) 2,089
Cash [$280,000 * 12.00% * (6/12)]

Dec 31, 11 Interest Expense [$20,866 * 0.70 * (1/6)] 2,434

Premium on Bonds Payable [$3,134 * 0.70 * (1/6)] 366
Interest Payable [$280,000 * 12.00% * (1/12)]

Jun 1, 12 Interest Expense [$20,866 * 0.70 * (5/6)] 12,172

Interest Payable [$280,000 * 12.00% * (1/12)] 2,800
Premium on Bonds Payable [$3,134 * 0.70 * (5/6)] 1,828
Cash [$280,000 * 12.00% * (6/12)]

Dec 1, 12 Interest Expense ($20,709 * 0.70) 14,496

Premium on Bonds Payable ($3,291 * 0.70) 2,304
Cash [$280,000 * 12.00% * (6/12)]

Schedule of Bond Discount Amortization

Effective Interest Method
12% Bonds Sold to Yield 10%
Carrying
Cash Interest Bond
Date Value
Paid Expense Premium
of Bonds
Jun 1, 10 425,853
Dec 1, 10 24,000 21,293 2,707 423,145
Jun 1, 11 24,000 21,157 2,843 420,303
Dec 1, 11 24,000 21,015 2,985 417,318
Jun 1, 12 24,000 20,866 3,134 414,184
Dec 1, 12 24,000 20,709 3,291 410,893
Jun 1, 13 24,000 20,545 3,455 407,438
Dec 1, 13 24,000 20,372 3,628 403,810
Jun 1, 14 24,000 20,190 3,810 400,000
e

ndicated. Use the effective

plicable). Amortize premium

s on March 1, 2010. The

013.
011.

500,000

3,325
25,000

2,350
16,667
s annual value.

1,175
25,000

3,736
25,000

2,640
16,667
s on June 1, 2010. The
bonds
$120,000
es through

400,000
25,853 270.8

24,000
s annual value.

4,000

24,000

4,800

4,294
121,200
16,800

2,800

16,800

16,800