Venezuela 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, 2017 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%. (There is an 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. Venezuela Inc. paid and capitalized $50,000 in bond issuance costs related to the bond issue. Venezuela prepares financial statements in accordance with IFRS.

Instructions

(a) Using time value of money tables, a financial calculator, and computer spreadsheet functions, calculate the value of the bonds and prepare the journal entry to record the issuance of the bonds on January 1, 2017. (Hint: Refer to Appendix 3B for tips on calculating. For the journal entry, use the amount arrived at using the time value of money tables.)

(b) Prepare a bond amortization schedule up to and including January 1, 2022 using the effective interest method.

(c) Assume that on July 1, 2020, 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 Venezuela Inc. to issue the bonds totaled $50,000 as above. If Venezuela Inc. chose to apply the fair value option and thus expense these costs, how would this affect the amount of interest expense that it recognized 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 Venezuela would apply the fair value option under IFRS 9.