In: Accounting
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. Prepare a bond amortization schedule.
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.
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 |
|
||||||
Cash account | 20100 | |||||||
Discount on bonds Payable | 5,956.40 | |||||||
Dec 31 19 | Interest expense |
|
||||||
Cash account | 20100 | |||||||
Discount on bonds Payable | 6,194.66 | |||||||
Dec 31 20 | Interest expense |
|
||||||
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 |