Question

PA10-7 (Supplement 10B) Recording Bond Issue, Interest Payments (Effective-Interest Amortization), and Early Bond Retirement [LO 10-S2]

On January 1, 2018, Surreal Manufacturing issued 520 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 $505,572. Surreal uses the 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.

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	$5,05,572	$20,223	$15,600	$4,623	$5,10,195
1/1/2019-12/31/2019	$5,10,195	$20,408	$15,600	$4,808	$5,15,003
1/1/2020-12/31/2020	$5,15,003	$20,597	$15,600	$4,997	$5,20,000

Solution 2 to 5:

Surreal Manufacturing
Journal Entries
Date	Particulars	Debit	Credit
1-Jan,2018	Cash Dr	$5,05,572
	Discount on bond payable Dr	$14,428
	To Bond Payable		$5,20,000
31-Dec,2018	Interest Expense Dr	$20,223
	To Cash		$15,600
	To Discount on bond payable		$4,623
31-Dec,2019	Interest Expense Dr	$20,408
	To Cash		$15,600
	To Discount on bond payable		$4,808
31-Dec,2020	Interest Expense Dr	$20,597
	Bond Payable Dr	$5,20,000
	To Cash (520000+15600)		$5,35,600
	To Discount on bond payable		$4,997
1-Jan,2020	Bond Payable Dr	$5,20,000
	Loss on Bond retirement Dr	$10,197
	To Cash (520000*101%)		$5,25,200
	To Discount on bond payable		$4,997