On January 1, 2018, Methodical Manufacturing issued 100 bonds, each with a face value of $1,000, a stated interest rate of 5 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 4.00 percent, so the total proceeds from the bond issue were $102,776. Methodical uses the simplified effective interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.
Required:
Solution 1:
Bond Amortization Schedule - Methodical Manufacturing | |||||
Date | Cash Paid | Interest Expense | Premium Amortized | Unamortized premium | Carrying Value |
01-Jan-18 | $2,776 | $1,02,776 | |||
31-Dec-18 | $5,000 | $4,111 | $889 | $1,887 | $1,01,887 |
31-Dec-19 | $5,000 | $4,075 | $925 | $963 | $1,00,963 |
31-Dec-20 | $5,000 | $4,038 | $962 | $0 | $1,00,000 |
Solution 2 to 5:
Journal Entries - Methodical Manufacturing | |||
Date | Particulars | Debit | Credit |
01-Jan-18 | Cash A/c Dr | $1,02,776 | |
To bonds payable | $1,00,000 | ||
To Preimum on bond payable | $2,776 | ||
(Being bond issued at premium) | |||
31-Dec-18 | Interest Expense Dr | $4,111 | |
Preimum on bond payable Dr | $889 | ||
To Cash | $5,000 | ||
(To record interest payment) | |||
31-Dec-19 | Interest Expense Dr | $4,075 | |
Preimum on bond payable Dr | $925 | ||
To Cash | $5,000 | ||
(To record interest payment) | |||
31-Dec-20 | Interest Expense Dr | $4,038 | |
Preimum on bond payable Dr | $962 | ||
To Cash | $5,000 | ||
(To record interest payment) | |||
31-Dec-20 | Bond Payable Dr | $1,00,000 | |
To Cash | $1,00,000 | ||
(To record bond repayment at maturity) | |||
Journal Entries - Methodical Manufacturing | |||
Date | Particulars | Debit | Credit |
01-Jan-20 | Bond Payable Dr | $1,00,000 | |
Premium on bond Payable Dr | $962 | ||
Loss on retirement of bond Dr | $1,038 | ||
To Cash ($100,000*102%) | $1,02,000 | ||
(To record early retirement of bonds) |
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