Question

Hi could someone help me do what is wrong and explain me the debits and credits for the journal entries? Thanks!

On January 1, 2013, Surreal Manufacturing issued 790 bonds, each with a face value of $1.000, a stated interest rate of 3.50 percent paid annually on December 31, and a maturity date of December 31, 2015. On the issue date, the market interest rate was 4.00 percent, so the total proceeds from the bond issue were $779,041. Surreal uses the effective interest bond amortization method. Required: 1. Prepare a bond amortization schedule. (Round your final answers to the nearest whole dollar.) Answer is not complete. Changes During the Period Period Ended Interest Expense Cash Paid Discount Amortized Ending Bond Liability Balances Discount Carrying on Bonds Payable Value Bonds Payable 01/01/13 12/31/13 12/31/14 12/31/15 31,161 31,301 31.447 27.650 27,650 27.650 (3,511) 3,651 3.797 790,000 790.000 790,000 790,000 (7,448) (3,797) 0 782,552 786,203 790,000

Answer 1

(1)

Sl.No	Year	Cashflow	Discounting@4%	Discounted Cash Flow
1	Jan1,2013	$720000	1	$720000
2	Dec31,2013	($27650)	0.9615	($26585.475)
3	Dec31,2014	($27650)	0.9245	($25562.425)
4	Dec31,2015	($817650)	0.8889	($726809.085)

Here the discounting rate is taken as 4% as it is given that the present rate of interest provided to the bond holders is 4%.So the required rate of return to the bond holder will be 4% as he would expect atleast 4% return on his investment.

The Total of Sl.No. 2 to 5 is $77897, which shows a difference of $84.015 due to rounding off error of Discounting Factor.To remove this round off error it is advisable to not round off the decimal places, then the value would be $779041

(2)

Date	Particulars	LFno.	Debit	Credit
Jan1,2013	*Cash A/c Dr **Discount on 3.5% Bonds Dr To 3.5% Bonds (Being Bonds issued)		$779041 $10959	$720000

*As the Interest rate is 4% prevailing in the market after issuing bonds it will not fetch the entity its face value.

** $720000-$779041=$10959 will be the discount offered.

(3)

Date	Particulars	LFno.	Debit	Credit
Dec31,2013	*Interest Expense a/c Dr To Bank A/c To 3.5% Bonds a/c (Being Interest expense recognised)		$31600	$27650 $3950

* As the Entity follows Effective Interest Bond Amortization Method

Interest as on Dec, is $790000*4%=$31600

3.5% Bond Value = $790000+31600-27650=$793950

Actual Interest Payment is $790000*3.5%=$27650

Date	Particulars	LFno.	Debit	Credit
Dec31,2014	*Interest Expense a/c Dr To Bank A/c To 3.5% Bonds a/c (Being Interest expense recognised)		$31758	$27650 $4108

* As the Entity follows Effective Interest Bond Amortization Method

Interest as on Dec, is $793950*4%=$31758

3.5% Bond Value = $793950+31758-27650=$798058

Actual Interest Payment is $790000*3.5%=$27650

(4)

Date	Particulars	LFno.	Debit	Credit
Dec31,2015	*Interest Expense a/c Dr To Bank A/c To 3.5% Bonds a/c (Being Interest expense recognised)		$31922	$27650 $4272

* As the Entity follows Effective Interest Bond Amortization Method

Interest as on Dec, is $798058*4%=$31922

3.5% Bond Value = $798058+31922-27650=$802330

Actual Interest Payment is $790000*3.5%=$27650

Date	Particulars	LFno.	Debit	Credit
Dec31,2015	3.5% Bonds A/c Dr To Cash a/c To Discount on Bonds a/c To loss on redemption a/c (Being redemption made)		$802330	$790000 $10959 $1371

It is assumed that the redemption is made at Face value of the Bonds.

Alternatively Discount on Bonds could be written off on the life of the bond.