DU. Give the journal entries to (Supplement 10B) Recording Bond Issue, Interest

Question

DU. Give the journal entries to (Supplement 10B) Recording Bond Issue, Interest Payments (Effective-Interest Amortization), and Early Bond Retiremert Lt On January 1, 2015, 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, 2017. 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 effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.

Explanation / Answer

Solution:

Face Value of the bonds = 600 Bonds x Face Value of each bond $1,000 = $600,000

Issue price = $583,352

Issue price is less than face value, it means bonds are issued at discount. So we need to prepare the Amortization table for Discount.

Part 1 --- Bond Discount Amortization Table

Schedule of Bond Discount Amortization

Effective Interest Method

Date

Interest Expense (Carrying Value at beginning of the year * Market Interest Rate 4%)

Cash Paid (Face Value 600,000 * Coupon Interest Rate 3%)

Discount Amortized (Interest Expense - Cash Paid)

Carrying Amount of Bonds

1/1/15

$0

$583,352

12/31/15

$23,334

$18,000

$5,334

$588,686

12/31/16

$23,547

$18,000

$5,547

$594,234

12/31/17

$23,766

(Rounded off to Rs 3)

$18,000

$5,766

$600,000

Journal Entries

Event

Date

General Journal

Debit

Credit

2)

Jan.1, 2015

Cash (Issue proceeds from bonds)

$583,352

Discount on Bonds Payable (Bal fig)

$16,648

Bonds Payable (Face Value)

$600,000

3)

Dec.31, 2015

Interest Expense

$23,334

Discount on Bonds Payable

$5,334

Cash Interest Payable or Cash

$18,000

Dec.31, 2016

Interest Expense

$23,547

Discount on Bonds Payable

$5,547

Cash Interest Payable or Cash

$18,000

4)

Dec.31, 2017

Bonds Payable

$600,000

Interest Expense

$23,766

Discount on Bonds Payable

$5,766

Cash

$618,000

Part 5 --- Journal Entry for bond retirement

Amount to be paid to retire the bonds = Face Value x 101% = 600,000 x 101% = $606,000

Date

General Journal

Debit

Credit

Jan.1, 2017

Bonds Payable (Face Value)

$600,000

Loss on Retirement of Bonds (Bal fig)

$11,766

Discount on Bonds Payable (as on Dec.31, 2016) (600,000 - 594,234)

$5,766

Cash (Retirement Value 600,000 * 101%)

$606,000

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Schedule of Bond Discount Amortization

Effective Interest Method

Date

Interest Expense (Carrying Value at beginning of the year * Market Interest Rate 4%)

Cash Paid (Face Value 600,000 * Coupon Interest Rate 3%)

Discount Amortized (Interest Expense - Cash Paid)

Carrying Amount of Bonds

1/1/15

$0

$583,352

12/31/15

$23,334

$18,000

$5,334

$588,686

12/31/16

$23,547

$18,000

$5,547

$594,234

12/31/17

$23,766

(Rounded off to Rs 3)

$18,000

$5,766

$600,000

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