Question

Novak Co. is building a new hockey arena at a cost of $2,620,000. It received a downpayment of $480,000 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, 2019, 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, 2019. (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, 2019

Answer 1

Solution

Date	Account Title and Explanation	Debit	Credit
January 1 2019	Cash	$ 2,266,019
	Premium on bonds payable		$ 126,019
	Bonds payable		$ 2,140,000
	(To record Issuance of bonds )

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 2,140,000
Market Rate	11.00%	11.00%		Term (in years)	10
Coupon Rate	12.00%	12.00%		Total no. of interest payments	10

.

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 2,140,000	at	11.00%	Interest rate for	10	term payments
PV of $1	0.35218
PV of	$ 2,140,000	=	$ 2,140,000	x	0.35218	=	$ 753,665	A
Interest payable per term	at	12.00%	on	$ 2,140,000
Interest payable per term	$ 256,800
PVAF of 1$	for	11.00%	Interest rate for	10	term payments
PVAF of 1$	5.88923
PV of Interest payments	=	$ 256,800	x	5.88923	=		$ 1,512,354	B
				Bond Value (A+B)			$ 2,266,019