Question

PA10-6 (Supplement 10A) Recording Bond Issue, Interest Payments (Straight-Line Amortization), and Early Bond Retirement [LO 10-S1]

On January 1, 2018, Loop Raceway issued 540 bonds, each with a face value of $1,000, a stated interest rate of 6 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 7 percent, so the total proceeds from the bond issue were $525,829. Loop uses the straight-line 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 97.

Answer 1

	Face value					540000
	issue price					-525,829
	discount on bonds					14171
1)		Amortization Schedule
	year	cash	interest	discount	unamorti	Carrying
		interest	expense	amortized	sed dis	value
		6%
	1/1/2018				14,171	525,829
	12/31/2018	32400	37124	4724	9447	530,553
	12/31/2019	32400	37124	4724	4723	535,277
	12/31/2020	32400	37123	4723	0	540,000
2)	Date	Account titles & Explanations					Debit	Credit
	1/1/2018	Cash					525,829
		discount on bonds					14171
		bonds payable						540000
	12/31/2018	interest expense					37124
		discount on bonds						4724
		cash						32400
	12/31/2019
		interest expense					37124
		discount on bonds						4724
		cash						32400
	12/31/2020
		interest expense					37124
		discount on bonds						4724
		cash						32400
		Bonds payable					540000
		cash						540,000
	1/1/2020	Bonds payable					540000
		Discount on bonds						4,723
		cash		(540,000*.97)				523800
		gain on redemption						11,477