Venzuela Inc is building a new hockey arena at a #1245

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, 2014, and pay interest annually 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. Venzuela prepares financial statements in accordance with IFRS.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2014.

(b) Prepare a bond amortization schedule up to and including January 1, 2019, using the
effective interest method.

(c) Assume that on July 1, 2017, the company retires half of the bonds at a cost of $1,065,000
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 apply the fair value option 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? Assume that Venzuela would apply the fair value option
under IAS 39.

Venzuela Inc is building a new hockey arena at a

ANSWER
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