Question

On January 1, 2015, Surreal Manufacturing issued 550 bonds, each with a face value of $1,000, a stated interest rate of 3 percent paid annually on December 31, and a maturity date of December 31, 2017. On the issue date, the market interest rate was 4 percent, so the total proceeds from the bond issue were $534,739. Surreal uses the effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.

Required:

Prepare a bond amortization schedule and Complete the required journal entries to record the bond issue, interest payments on December 31, 2015 and 2016, interest and face value payment on December 31, 2017, and bond retirement. Assume the bonds are retired on January 1, 2017, at a price of 101. (please provide calculation process)

Answer 1

	Changes during the Period			Ending bond Liability balance
period	interest	Cash	discount	Bonds	discount on	Carrying value
ended	expense	paid	amortized	payable	bonds pay
1/1/2018				550,000	15,261	534,739
12/31/2018	21390	16500	4890	550000	10371	539629
12/31/2019	21585	16500	5085	550000	5286	544714
12/31/2020	21786	16500	5286	550000	0	550000
Date	General Journal				Debit	Credit
1/1/2018	Cash				534,739
	Discount on bonds payable				15,261
	Bonds payable					550,000
12/31/2018	interest expense				21390
	discount on bonds payable					4890
	cash					16500
12/31/2019
	interest expense				21585
	discount on bonds payable					5085
	cash					16500
12/31/2020
	interest expense				21786
	discount on bonds payable					5286
	cash					16500
1/1/2020	Bonds payable				550,000
	loss on redemption				10,786
	Discount on bonds					5,286
	cash					555500