Question

On January 1, 2017, Surreal Manufacturing issued 660 bonds, each with a face value of $1,000, a stated interest rate of 3.70 percent paid 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. Surreal uses the effective-interest bond amortization method.

Required:
1. Prepare a bond amortization schedule. (Round your final answers to the nearest whole dollar.)
2. Prepare the journal entry to record the bond issue.

3. Prepare the journal entries to record the interest payments on December 31, 2017, and 2018.

4. Prepare the journal entry to record the interest 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 bond retirement.

Answer 1

Part 1 – Bond Discount Amortization Table

Schedule of Bond Discount Amortization
Effective Interest Method
Date	Interest Expense (Carrying Value at beginning 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	General Journal	Debit	Credit
Jan.1, 2017	Cash	$654,508
	Discount on Bonds Payable (balancing figure)	$5,492
	Bonds Payable		$660,000
	(To record issuance of bonds)

Part 3 –

Date	General Journal	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 interest payment)
Dec.31, 2018	Interest Expense	$26,251
	Cash or Interest Payable		$24,420
	Discount on Bonds Payable		$1,831
	(To record second interest payment)

Part 4 –

Date	General Journal	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 interest payment)
Dec.31, 2019	Bonds Payable	$660,000
	Cash		$660,000
	(To record maturity of bonds)

Part 5 –

Date	General Journal	Debit	Credit
Jan.1, 2019	Bonds Payable	$660,000
	Loss on Retirement of Bonds (balancing figure)	$8,501
	Discount on Bonds Payable (As on Dec 31, 2018)		$1,901
	Cash (660 Bonds * $1000 * 101%)		$666,600
	(To record retirement of bonds)

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