Question

On January 1, 2018, Surreal Manufacturing issued 620 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 $602,797. 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 103.

Answer 1

Please find below spread sheet useful to compute desired results: -

A 1 Face Value =620*1000 2 Annual Coupon Rate =3/100 3 Annual Coupon Payment =B1*B2 4 Period in years 5 market interest rate =4/100 6 Total Proceeds 602797 7 Period Ended Changes during the period Ending Bonds Liability Balance 8 Cash Paid Discount amortized Interest Expense Bonds Payable Discount on Bonds payable Carrying Value 9 01 Jan. 2018 =$B$1 =B1-B6 =B6 10 31 Dec. 2018 =B3 =(SBS1-SBS6/SBS4 =B10+C10 =SBS1 =F9-C10 =G9+C10 11 31 Dec. 2019 J=B3 =(SBS1-SBS6/SBS4 =B11+C11 =SBS1 =F10-C11 =G10+C11 12 31 Dec. 2020 =B3 =($B$1-SBS6)/SB$4 =B12+C12 =SBS1 =G11+C12 13 14 Journal 15 Date Account titles and Explanations Debit Credit 16 01 Jan. 2018 Cash =G9 Discount on Bonds Payable 18 Bonds Payable =C16+C17 (Issuance of bonds payable recorded) 17 =F9 31 Dec. 2018 =D10 =C10 Interest Expense Discount on bonds payable Cash (interest expense recorded) =B10

C D 26 31 Dec. 2019 =D11 в Interest Expense Discount on bonds payable Cash (interest expense recorded) =C11 =B11 28 31 Dec. 2020 =D12 Interest Expense Discount on bonds payable Cash interest expense recorded) =C12 =B12 =B1 Bonds Payable Cash (face value repayment of bonds payable recorded) =C36 36 31 Dec. 2020 37 38 39 40 01 Jan. 2020 41 42 =D37 =D43+D42-C40 Bonds payable Loss on retirement of bonds Discount on Bonds Payable Cash (bond retirement recorded) =F11 =B1/1000*1030 43

End results would be as follows: -

3% A 1 Face Value $620,000.00 2 Annual Coupon Rate 3 Annual Coupon Payment $18.600.00 4 Period in years 5 market interest rate 6 Total Proceeds S602,797.00 7 Period Ended Changes during the period Ending Bonds Liability Balance 8 Cash Paid Discount amortized Interest Expense Bonds Payable Discount on Bonds payable Carrying Value 9 01 Jan. 2018 $620,000.00 $17.203.00 $602,797.00 10 31 Dec. 2018 $18.600.00 5734.333333 $24.334.33 $620,000.00 $11,468.67 $608,531.33 11 31 Dec. 2019 $18.600.00 5734.333333 $24.334.33 $620,000.00 $5,734.33 $614,265.67 12 31 Dec. 2020 $18.600.000 5734.333333 $24,334.33 $620,000.00 $620,000.00 13 14 Journal 15 Date Account titles and Explanations Debit Credit 16 01 Jan. 2018 Cash $602.797.00 Discount on Bonds Payable $17.203.00 18 Bonds Payable S620,000.00 (Issuance of bonds payable recorded) 17 31 Dec. 2018 $24.334.33 Interest Expense Discount on bonds payable Cash interest expense recorded) 5734.333333 $18.600.00

$24.334.33 26 31 Dec. 2019 27 в Interest Expense Discount on bonds payable Cash interest expense recorded) 5734.333333 $18.600.00 28 31 Dec. 2020 $24.334.33 Interest Expense Discount on bonds payable Cash (interest expense recorded) 5734.333333 $18.600.00 $620.000.00 36 31 Dec. 2020 37 Bonds Payable Cash (face value repayment of bonds payable recorded) $620.000.00 38 39 40 01 Jan. 2020 $620,000.00 $24.334.33 41 42 43 Bonds payable Loss on retirement of bonds Discount on Bonds Payable Cash (bond retirement recorded) $5.734.33 $638.600.00