On January 1, 2015, Loop Raceway issued 660 bonds, each with a face value of $1,
ID: 2598523 • Letter: O
Question
On January 1, 2015, Loop Raceway issued 660 bonds, each with a face value of $1,000, a stated interest rate of 5% paid annually on December 31, and a maturity date of December 31, 2017. On the issue date, the market interest rate was 6 percent, so the total proceeds from the bond issue were $642,345. Loop uses the straight-line bond amortization method and adjusts for any rounding errors when recording interest in the final year.
Complete the required journal entries to record the bond issue, interest payments on December 31, 2015 and 2016, bond retirement. Assume the bonds are retired on January 1, 2017, at a price of 98. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
1. Record the issuance of 660 bonds at face value of $1,000 each for $642,345.
2. Record the interest payment on December 31, 2015.
3. Record the interest payment on December 31, 2016.
4. Record the interest and face value payment on December 31, 2017.
5. Record the retirement of the bonds at a quoted price of 98, assuming the bonds are retired on January 1, 2017.
On January 1, 2015, Loop Raceway issued 660 bonds, each with a face value of $1,000, a stated interest rate of 5% paid annually on December 31, and a maturity date of December 31, 2017. On the issue date, the market interest rate was 6 percent, so the total proceeds from the bond issue were $642,345. Loop uses the straight-line bond amortization method and adjusts for any rounding errors when recording interest in the final year.
Explanation / Answer
Solution:
Part 1 – Bond Amortization Schedule
Changes during the period
Ending Bond Liability Balances
Period Ending
Cash Paid
Discount Amortized
Interest Expense
Bonds Payable
Discount on Bonds Payable
Carrying Value
(a)
(b)
(a+b)
(d)
(e)
(d-e)
1/1/2015
$660,000
$17,655
$642,345
12/31/2015
$33,000
$5,885
$38,885
$660,000
$11,770
$648,230
12/31/2016
$33,000
$5,885
$38,885
$660,000
$5,885
$654,115
12/31/2017
$33,000
$5,885
$38,885
$660,000
$0
$660,000
Part 2 – Journal Entries
Date
Account Titles
Debit
Credit
Jan.1, 2015
Cash
$642,345
Discount on Bonds Payable
$17,655
Bonds Payable
$660,000
Dec.31, 2015
Interest Expense
$38,885
Cash Interest Payable
$33,000
Discount on Bonds Payable
$5,885
Dec.31, 2016
Interest Expense
$38,885
Cash Interest Payable
$33,000
Discount on Bonds Payable
$5,885
Dec.31, 2017
Bonds Payable
$660,000
Interest Expense
$38,885
Cash
$693,000
Discount on Bonds Payable
$5,885
Part 3 -- Record the retirement of the bonds at a quoted price of 98, assuming the bonds are retired on January 1, 2017.
Retirement Value of the bonds = 660 bonds x Par Value $1,000 x 98% = $646,800
Carrying Value of the bonds as on Jan 1, 2017 = $654,115
Date
Account Titles
Debit
Credit
Jan.01, 2017
Bonds Payable
$660,000
Cash
$646,800
Gain on Retirement of Bonds (balancing figure)
$7,315
Discount on Bonds Payable
$5,885
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Changes during the period
Ending Bond Liability Balances
Period Ending
Cash Paid
Discount Amortized
Interest Expense
Bonds Payable
Discount on Bonds Payable
Carrying Value
(a)
(b)
(a+b)
(d)
(e)
(d-e)
1/1/2015
$660,000
$17,655
$642,345
12/31/2015
$33,000
$5,885
$38,885
$660,000
$11,770
$648,230
12/31/2016
$33,000
$5,885
$38,885
$660,000
$5,885
$654,115
12/31/2017
$33,000
$5,885
$38,885
$660,000
$0
$660,000
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