Question

On January 1, 2018, Surreal Manufacturing issued 600 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 $583,352. 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 101.

   1. Record the issuance of 600 bonds at face value of $1,000 each for $583,352.
   2. Record the interest payment on December 31, 2018.
   3. Record the interest payment on December 31, 2019.
   4. Record the interest and face value payment on December 31, 2020.
   5. Record the retirement of the bonds at a quoted price of 101, assuming the bonds are retired on January 1, 2020.

Answer 1

Solution 1:

Bond Amortization Schedule
	Beginning of Year				End of Year
Period	Bonds Payable, Net	Interest Expense	Cash Paid	Increase in Bond Payable, net	Bonds Payable, Net
1/1/2018-12/31/2018	$5,83,352	$23,334	$18,000	$5,334	$5,88,686
1/1/2019-12/31/2019	$5,88,686	$23,547	$18,000	$5,547	$5,94,234
1/1/2020-12/31/2020	$5,94,234	$23,766	$18,000	$5,766	$6,00,000

Solution 2 to 5:

Surreal Manufacturing
Journal Entries
Date	Particulars	Debit	Credit
1-Jan,2018	Cash Dr	$5,83,352
	Discount on bond payable Dr	$16,648
	To Bond Payable		$6,00,000
31-Dec,2018	Interest Expense Dr	$23,334
	To Cash		$18,000
	To Discount on bond payable		$5,334
31-Dec,2019	Interest Expense Dr	$23,547
	To Cash		$18,000
	To Discount on bond payable		$5,547
31-Dec,2020	Interest Expense Dr	$23,766
	Bond Payable Dr	$6,00,000
	To Cash (600000+18000)		$6,18,000
	To Discount on bond payable		$5,766
1-Jan,2020	Bond Payable Dr	$6,00,000
	Loss on Bond retirement Dr	$11,766
	To Cash (600000*101%)		$6,06,000
	To Discount on bond payable		$5,766