Question

Venzuela Inc. is building a new hockey arena at a cost of $2.5 million. It received a down payment of $500,000 from local businesses to support the project, and now needs to borrow $2 million to complete the project. It therefore decides to issue $2 million of 10-year, 10.5% bonds. These bonds were issued on January 1, 2010, and pay interest annu- ally on each January 1. The bonds yield 10% to the investor and have an effective interest rate to the issuer of 10.4053% (increased effective interest rate due to the capitalization of the bond issue costs). Any additional funds that are needed to complete the project will be obtained from local businesses. Venzuela Inc. paid and capitalized $50,000 in bond issuance costs related to the bond issue.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2010.
(b) Prepare a bond amortization schedule up to and including January 1, 2015, using the effective interest method.
(c) Assume that on July 1, 2013, the company retires half of the bonds at a cost of $1.065 million plus accrued interest. Prepare the journal entry to record this retirement.
(d) Assume that the costs incurred by Venzuela Inc. to issue the bonds totalled $50,000 as above. If Venzuela Inc. chose to carry the bonds at fair value and thus expense these costs, how would this affect the amount of interest expense that is recognized by Venzuela Inc. each year and over the 10-year term of the bonds in total, compared with its current accounting practice of capitalizing the bond issue costs?


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  • CreatedAugust 23, 2015
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