Question

On January 1, 2015, Methodical Manufacturing issued 100 bonds, each with a face value of $1,000, a stated interest rate of 7 percent paid annually on December 31, and a maturity date of December 31, 2017. On the issue date, the market interest rate was 6.3 percent, so the total proceeds from the bond issue were $101,857. Methodical uses the effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.

Prepare a bond amortization schedule including date, interest expense, cash paid, amortized premium or discount, remaining premium or discount, and carrying value.

Prepare the journal entry to record the bond issue, interest payments on December 31, 2015 and 2016, interest and face value payment on December 31, 2017 and the bond retirement. Assume the bonds are retired on January 1, 2017, at a price of 102.

Answer 1

Solution 1:

Bond Amortization Schedule - Methodical Manufacturing
Date	Cash Paid	Interest Expense	Premium Amortized	Unamortized premium	Carrying Value
1-Jan-15				$1,857	$101,857
31-Dec-15	$7,000	$6,417	$583	$1,274	$101,274
31-Dec-16	$7,000	$6,380	$620	$654	$100,654
31-Dec-17	$7,000	$6,346	$654	$0	$100,000

Solution 2:

Journal Entries - Methodical Manufacturing
Date	Particulars	Debit	Credit
1-Jan-15	Cash A/c Dr	$101,857.00
	To bonds payable		$1,000,000.00
	To Preimum on bond payable		$1,857.00
	(Being bond issued at premium)
31-Dec-15	Interest Expense Dr	$6,417.00
	Preimum on bond payable Dr	$583.00
	To Cash		$7,000.00
	(To record interest payment)
31-Dec-16	Interest Expense Dr	$6,380.00
	Preimum on bond payable Dr	$620.00
	To Cash		$7,000.00
	(To record interest payment)
31-Dec-17	Interest Expense Dr	$6,346.00
	Preimum on bond payable Dr	$654.00
	To Cash		$7,000.00
	(To record interest payment)
31-Dec-17	Bond Payable Dr	$100,000.00
	To Cash		$100,000.00
	(To record bond repayment at maturity)

Journal Entries - Methodical Manufacturing
Date	Particulars	Debit	Credit
1-Jan-17	Bond Payable Dr	$100,000.00
	Premium on bond Payable Dr	$654.00
	Loss on retirement of bond Dr	$1,346.00
	To Cash ($300,000*102%)		$102,000.00
	(To record early retirement of bonds)