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In: Accounting

On January 1, 2018, Surreal Manufacturing issued 670 bonds, each with a face value of $1,000,...

On January 1, 2018, Surreal Manufacturing issued 670 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, 2020. On the issue date, the market interest rate was 4 percent, so the total proceeds from the bond issue were $651,410. Surreal uses the effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.

Required:

  1. 1. Prepare a bond amortization schedule.

  2. 2-5. Prepare the journal entries to record the bond issue, the interest payments on December 31, 2018 and 2019, the interest and face value payment on December 31, 2020 and the bond retirement. Assume the bonds are retired on January 1, 2020, at a price of 102.

Solutions

Expert Solution

Period Bonds payable Int Exp Cash paid Increase in bonds payable Bonds payable at end
2018            651,410 26,056.40        20,100 5,956.40 657,366.40
2019      657,366.40 26,294.66        20,100 6,194.66 663,561.06
2020      663,561.06 26,542.44        20,100 6,442.44 670,000.00
Journal entries:
Date Accounts title and explanations Debit $ Credit $
jan 01 18 Cash account 651410
Discount on Bonds Payable 18590
     Bonds payable 670000
Dec 31 18 Interest expense
26,056.40
    Cash account 20100
    Discount on bonds Payable 5,956.40
Dec 31 19 Interest expense
26,294.66
    Cash account 20100
    Discount on bonds Payable 6,194.66
Dec 31 20 Interest expense
26,542.44
    Cash account 20100
    Discount on bonds Payable 6,442.44
Dec31 20 Bonds Payable 670000
    Cash account 670000
Redemption at 102.
01.01.20 Bonds Payable 670000
Loss on redemption of bonds 19842.44
      Cash account (670000*102%) 683400
Discount on bonds payable

6442.44

ekkarill92 answered 1 year ago
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