Question

On January 1, 2018, Loop Raceway issued 550 bonds, each with a face value of $1,000, a stated interest rate of 5 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 6 percent, so the total proceeds from the bond issue were $535,288. 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 98.

Answer 1

Solution 1:

Period	Changes during the period			Ending bond liability balances
	Cash Paid	Discount Amortized	Interest expense	Bond payable	Discount on bond payable	Carrying value
1-Jan-18				$550,000	$14,712	$535,288
31-Dec-18	$27,500	$4,904	$32,404	$550,000	$9,808	$540,192
31-Dec-19	$27,500	$4,904	$32,404	$550,000	$4,904	$545,096
31-Dec-20	$27,500	$4,904	$32,404	$550,000	$0	$550,000

solution 2-5:

Journal Entries - Loop Raceway
Event	Date	Particulars	Debit	Credit
1	1-Jan-18	Cash Dr	$535,288.00
		Discount on bond payable Dr	$14,712.00
		To Bond Payable		$550,000.00
		(To record issue of bond)
2	31-Dec-18	Interest expense Dr	$32,404.00
		To Cash		$27,500.00
		To Discount on bond payable		$4,904.00
		(To record semiannual interest payment and discount amortization)
3	31-Dec-19	Interest expense Dr	$32,404.00
		To Cash		$27,500.00
		To Discount on bond payable		$4,904.00
		(To record semiannual interest payment and discount amortization)
4	31-Dec-20	Interest expense Dr	$32,404.00
		Bond Payable Dr	$550,000.00
		To Cash		$577,500.00
		To Discount on bond payable		$4,904.00
		(To record interest payment to retiring bond holders)
5	1-Jan-20	Bond Payable Dr	$550,000.00
		To Discount on bond payable		$4,904.00
		To Cash		$539,000.00
		To Gain on bond retirement		$6,096.00
		(To record early retirement of bond)