Question

On January 1, 2018, Loop Raceway issued 620 bonds, each with a face value of $1,000, a stated interest rate of 7 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 8 percent, so the total proceeds from the bond issue were $604,002. Loop uses the straight-line 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 99.

Prepare a bond amortization schedule.

	Changes During the Period Ending Bond Liability Balances Period Ended Cash Paid Discount Amortized Interest Expense Bonds Payable Discount on Bonds Payable Carrying Value 01/01/18 12/31/18 12/31/19 12/31/20

Record the issuance of 620 bonds at face value of $1,000 each for $604,002.

• Record the interest payment on December 31, 2018.
• Record the interest payment on December 31, 2019.
• Record the interest and face value payment on December 31, 2020.
• Record the retirement of the bonds at a quoted price of 99, assuming the bonds are retired on January 1, 2020.

Answer 1

Solution Face Value of Bonds (620 bonds x $1,000) $620,000 Issue price of Bonds $604,002 Discount on issue of Bonds ($620,000 - $604,002) $15,998 Stated rate of interest 7% Market rate of interest 8% Bond life 3 Years Interest payment frequency Total no. of interest payment till maturity Annually Annual interest payment = $620,000 x 7% $43,400 Required 1.: Bond amortization table Ending Bond Liability Balances Bonds Payable Bonds Payable Changes During the Period Discount Interest Discount on Carrying Period Ended Cash paid Amortized Value Expense 01/01/18 $620,000 $15,998 $604,002 $10,665 12/31/18 $43,400 $5,333 $48,733 $620,000 $609,335 $614,668 $620,000 $620,000 $620,000 $43,400 $43,400 12/31/19 12/31/20 $5,333 $48,733 $5,332 $5,332 $48,732 Total interest payment over the life of Bonds ($43,400 x 3 Years) $130,200 Add: Face value of Bonds to be repaid at the time of maturity $620,000 Total payment during entire life of bonds Less: Issue price of Bonds $750,200 ($604,002) $146,198 Total Bonds interest expense to be recognized over the bonds' life Straight line interest expense for each year $146,198 3 Years Straight line Bond discount amortization for each year $48,733 - $43,400 $48,733 $5,333 Required 2-5: Journal entry Account Titles and Explanation Debit Credit Date $604,002 $15,998 Jan. 1, 2018 Cash Discount on Bonds Payable Bonds Payable (To record issuance of 620 bonds for $604,002. $620,000 Account Titles and Explanation Debit Credit Date Dec. 31, 2018 Interest expense $48,733 Discount on Bonds Payable $5,333 Cash $43,400 (To record interest payment and discount amortization) Dec. 31, 2019 Interest expense $48,733 Discount on Bonds Payable $5,333 Cash $43,400 (To record interest payment and discount amortization) Dec. 31, 2020 Interest expense Bonds Payable $48,732 $620,000 Discount on Bonds Payable $5,332 $663,400 Cash To record the interest and face value payment on maturity) Record the retirement of the bonds at a quoted price of 99, assuming the bonds are retired on January 1, 2020. Jan. 01, 2020 Bonds Payable $620,000 Discount on Bonds Payable $5,332 $613,800 $868 Cash ($620,000 x 99/100) Gain on retirement on Bonds (Bal. fig.) (To record retirement of bonds at a quoted price of 99)