Question

Sweet Co. is building a new hockey arena at a cost of $2,360,000. It received a downpayment of $500,000 from local businesses to support the project, and now needs to borrow $1,860,000 to complete the project. It therefore decides to issue $1,860,000 of 10%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 9%. Prepare the journal entry to record the issuance of the bonds on January 1, 2016. Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. Assume that on July 1, 2019, Sweet Co. redeems half of the bonds at a cost of $1,023,400 plus accrued interest. Prepare the journal entry to record this redemption.

Answer 1

The journal entry for the issuance of bonds includes debiting cash and crediting bonds payable. An amortization schedule using the effective interest method is used for premium or discount amortization. Redemption of bonds involves debiting bonds payable, adjusting for accrued interest, and crediting cash along with recognizing any gain or loss.

Step-by-step explanation:

For recording the issuance of the bonds on January 1, 2016, Sweet Co. would make the journal entry by debiting cash for the amount received and crediting bonds payable.

If the bonds were issued at a premium (since the market interest rate of 9% is lower than the bond interest rate of 10%), this premium needs to be amortized over the life of the bonds. The effective interest method would be used for the amortization schedule, which involves calculating the interest expense based on the carrying amount of the bond and the market interest rate. The difference between the actual interest paid and the interest expense is the amount of premium amortized each year.

On July 1, 2019, when Sweet Co. redeems half of the bonds, the journal entry would include debiting bonds payable, crediting cash for the redemption price, and recognizing any gain or loss on the redemption. The gain or loss is calculated as the difference between the carrying amount of the bonds being redeemed and the redemption cost. Additionally, Sweet Co. would need to adjust for any accrued interest by debiting interest expense and crediting cash.