On January 1, 2017, Surreal Ma
On January 1, 2017, Surreal Manufacturing issued 660 bonds, eachwith a face value of $1,000, a stated interest rate of 3.70 percentpaid annually on December 31, and a maturity date of December 31,2019. On the issue date, the market interest rate was 4.00 percent,so the total proceeds from the bond issue were $654,508. Surrealuses the effective-interest bond amortization method.Required:1. Prepare a bond amortization schedule. (Roundyour final answers to the nearest whole dollar.)2. Prepare the journal entry to record the bondissue.
3. Prepare the journal entries to record theinterest payments on December 31, 2017, and 2018.
4. Prepare the journal entry to record theinterest and face value payment on December 31, 2019.
5. Assume the bonds are retired on January 1,2019, at a price of 101. Give the journal entry to record the bondretirement.
Answer:
Part 1 – Bond DiscountAmortization Table
|
Schedule of Bond DiscountAmortization |
||||
|
Effective Interest Method |
||||
|
Date |
Interest Expense (Carrying Value atbeginning of the year * Market Interest Rate 4%) |
Cash Paid (Face Value 660,000 *Coupon Interest Rate 3.7%) |
Discount Amortized (Interest Expense- Cash Paid) |
Carrying Amount of Bonds |
|
1/1/17 |
|
$0 |
0 |
$654,508 |
|
12/31/17 |
$26,180 |
$24,420 |
$1,760 |
$656,268 |
|
12/31/18 |
$26,251 |
$24,420 |
$1,831 |
$658,099 |
|
12/31/19 |
$26,321 |
$24,420 |
$1,901 |
$660,000 |
|
$78,752 |
$73,260 |
$5,492 |
Part 2 –
|
Date |
GeneralJournal |
Debit |
Credit |
|
Jan.1,2017 |
Cash |
$654,508 |
|
|
|
Discount on Bonds Payable(balancing figure) |
$5,492 |
|
|
|
Bonds Payable |
|
$660,000 |
|
|
(To record issuance ofbonds) |
|
|
Part 3 –
|
Date |
GeneralJournal |
Debit |
Credit |
|
Dec.31,2017 |
Interest Expense |
$26,180 |
|
|
|
Cash or Interest Payable |
|
$24,420 |
|
|
Discount on Bonds Payable(Balancing figure) |
|
$1,760 |
|
|
(To record first interestpayment) |
|
|
|
|
|
|
|
|
Dec.31,2018 |
Interest Expense |
$26,251 |
|
|
|
Cash or Interest Payable |
|
$24,420 |
|
|
Discount on BondsPayable |
|
$1,831 |
|
|
(To record second interestpayment) |
|
|
Part 4 –
|
Date |
GeneralJournal |
Debit |
Credit |
|
Dec.31,2019 |
Interest Expense |
$26,321 |
|
|
|
Cash or Interest Payable |
|
$24,420 |
|
|
Discount on Bonds Payable(Balancing figure) |
|
$1,901 |
|
|
(To record third interestpayment) |
|
|
|
|
|
|
|
|
Dec.31,2019 |
Bonds Payable |
$660,000 |
|
|
|
Cash |
|
$660,000 |
|
|
(To record maturity ofbonds) |
|
|
Part 5 –
|
Date |
GeneralJournal |
Debit |
Credit |
|
Jan.1,2019 |
Bonds Payable |
$660,000 |
|
|
|
Loss on Retirement of Bonds(balancing figure) |
$8,501 |
|
|
|
Discount on Bonds Payable (As onDec 31, 2018) |
|
$1,901 |
|
|
Cash (660 Bonds * $1000 *101%) |
|
$666,600 |
|
|
(To record retirement ofbonds) |
|
|
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