Question

On January 1, 2021, Splash City issues $370,000 of 6% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. The market interest rate on the issue date is 7% and the bonds issued at $330,493.

Required:

1. Using an amortization schedule, show that the bonds have a carrying value of $332,463 on December 31, 2022. (Round Interest expense to nearest whole dollar.)

	Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022

If the market interest rate drops to 6% on December 31, 2022, it will cost $370,000 to retire the bonds. Record the retirement of the bonds on December 31, 2022.

Record the retirement of the bonds.

Answer 1

1
Date	Cash Paid	Interest expense	Increase in Carrying Value	Carrying value
01/01/2021				330493
06/30/2021	11100	11567	467	330960
12/31/2021	11100	11584	484	331444
06/30/2022	11100	11601	501	331945
12/31/2022	11100	11618	518	332463

2

		Debit	Credit
December 31, 2022	Bonds payable	370000
	Loss on redemption of bonds	37537
	Discount on Bonds payable		37537	=370000-332463
	Cash		370000
Workings:
Cash paid	11100	=370000*6%/2
Interest expense = Carrying value*7%/2
Increase in Carrying Value = Interest expense-Cash paid