Question

On January 1, 2018, Surreal Manufacturing issued 530 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 $515,294. Surreal uses the simplified 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 103.

Answer 1

Date	Accounts Title	Debit	Credit
Jan-1 2018	Cash	515,294
	Discount on bonds payable	14,706
	Bonds Payable		530,000
	(To record issue of bonds)
Dec 31, 2018	Interest Expense	20,612		(515294*4%)
	Discount on bonds payable		4,712	(20612-15900)
	Cash		15,900	(530000*3%)
	(To record interest Expense)
Dec 31, 2019	Interest Expense	20,800		((515294+4712)*4%)
	Discount on bonds payable		4,900	(20800-15900)
	Cash		15,900	(530000*3%)
	(To record interest Expense)
Dec 31, 2020	Interest Expense	20,994		((515294+4712+4900)*4%)
	Bonds Payable	530,000
	Discount on bonds payable		5,094	(20800-15900)
	Cash		545,900	(530000*3%)+530000
	(To record interest Expense and maturity)
JAN 1 2020	Bonds Payable	530,000
	Loss on redemption	20,994
	Cash		545,900
	Discount on bonds payable		5,094
	(To record redemption)