Question

On January 1, 2018, Methodical Manufacturing issued 100 bonds, each with a face value of $1,000, a stated interest rate of 6 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 5.50 percent, so the total proceeds from the bond issue were $101,347. Methodical 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 required journal entries to record the bond issue, 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.

• Req 1
• Req 2 to 5

Prepare a bond amortization schedule.

	Changes During the Period Ending Bond Liability Balances Period Ended Cash Paid Premium Amortized Interest Expense Bonds Payable Premium on Bonds Payable Carrying Value 01/01/18 $0 12/31/18 0 0 12/31/19 0 0 12/31/20 0 0

• Record the issuance of 100 bonds at face value of $1,000 each for $101,347.

Note: Enter debits before credits.

	Date General Journal Debit Credit Jan 01, 2018 101,347 Premium on Bonds Payable 1,000

• Record the interest payment on December 31, 2018.

Note: Enter debits before credits.

	Date General Journal Debit Credit Dec 31, 2018 Interest Expense Bonds Payable Cash

• Record the interest payment on December 31, 2019.

Note: Enter debits before credits.

	Date General Journal Debit Credit Dec 31, 2019 Interest Expense Bonds Payable Cash

• Record the interest and face value payment on December 31, 2020.

Note: Enter debits before credits.

	Date General Journal Debit Credit Dec 31, 2020 Interest Expense Bonds Payable Cash

• Record the retirement of the bonds at a quoted price of 103, assuming the bonds are retired on January 1, 2020.

Note: Enter debits before credits.

	Date General Journal Debit Credit Jan 01, 2020

  

Answer 1

Solution $100,000 $101,347 $1,347 Face Value of Bonds (100 bonds x $1,000) Issue price of Bonds Premium on issue of bonds ($101,347 - $100,000) Stated Rate of interest Market interest rate Interest payment frequency Bond life 6.00% 5.50% Yearly 3 Years Yearly Interest payment in cash = $100,000 x 6% = $6,000 Required 1: Prepare bond amortization schedule Step-1 : Calculation of Annual interest expense using straight-line method Total interest payment during the entire Bond life ($6,000 x 3 Years) Payment of face value on maturity of Bonds Less: Cash proceeds received on issue of Bonds Total Interest expense to be recognised during the entire Bond life $18,000 $100,000 ($101,347) $16,653 Annual Interest Expense to be recognised ($16,653 / 3 years) $5,551 Step-2 : Calculation of Annual premium amortization using straight-line method Annual interest payment ($100,000 x 6%) Annual interest expense Annual premium amortization ($6,000 - $5,551) $6,000 $5,551 $449 Step-3: Bond Amortization schedule Changes during the period Period Ended Cash Paid Premium Amortized Interest Expense Ending Bond Liability Balances Premium on Bonds Carrying Bonds Payable Value Payable $100,000 $1,347 $ 101,347 $100,000 $898 $100,898 $100,000 $449 $100,449 $100,000 $0 $100,000 01/01/18 12/31/18 12/31/19 12/31/20 $6,000 $6,000 $6,000 $449 $449 $449 $5,551 $5,551 $5,551 Required 2-5: Journal Entries Credit Debit $101,347 Date General Journal Jan. 1, 2018 Cash Premium on bonds payable Bonds Payable (To record issue of bonds at premium) $1,347 $100,000 Credit Date General Journal Dec 31, 2018 Interest expense Premium on bonds payable Cash (To record interest payment and premium amortization) Debit $5,551) $449 $6,000 Credit Date General Journal Dec 31, 2019 Interest expense Premium on bonds payable Cash (To record interest payment and premium amortization) Debit $5,551 S449 $6,000 Credit Date General Journal T Dec 31, 2020 Interest expense Premium on bonds payable Bonds Payable Cash (To record interest and face value payment on maturity) Debit $5,551) $449 $100,000 $106,000 Credit Date General Journal Jan 01, 2020 Bonds Payable Premium on bonds payable Loss on retirement on Bonds (Bal. fig.) Cash ($100,000 x 103%) (To record retirement of bonds at 103) Debit $100,000 $449 $2,551 $ 103,000