Question

14-2B (Issuance and Retirement of Bonds) StarCenter Co. Is building a new music arena at a cost of $5,600,000. It received a down payment of $600,000 from local businesses to support the project, and now needs to borrow $5,000,000 to complete the project. It therefore decides to issue $5,000,000 of 8%, 20-year bonds. These bonds were issued on January 1, 2013, and pay interest annually on each January 1. The bonds yield 10%. StarCenter paid $60,000 in bond issue costs related to the bond sale.

Answer 1

there are no requirements, but I assume that they ask about issuance costs and their amortization:

market price of the bonds:

PV of face value = $5,000,000 / (1 + 10%)²⁰ = $743,218

PV of coupon payments = $400,000 x 8.5136 (PV annuity factor, 10%, 20 periods) = $3,405,440

market price = $4,148,658

Journal entry to record issuance and bond issue costs

January 1, 2013

Dr Cash 4,088,658

Dr Discount on bonds payable 851,342

Dr Bond issue costs 60,000

Cr Bonds payable 5,000,000

amortization of bond discount and issue costs = ($4,088,658 x 10%) - $400,000 = $8,865.80 ≈ $8,866

allocation to bond issue costs = ($60,000 / $911,342) x $8,866 = $583.71 ≈ $584

allocation to bond discount = $8,866 - $584 = $8,282

Journal entry to record first coupon payment

January 1, 2014

Dr Interest expense 408,866

Cr Cash 400,000

Cr Discount on bonds payable 8,282

Cr Bond issue costs 584