Question

On January 1, 2013, Loop de Loop Raceway issued 550 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, 2015. On the issue date, the market interest rate was 6 percent, so the total proceeds from the bond issue were $535,288. Loop de Loop uses the straight-line bond amortization method Required: 1. Prepare a bond amortization schedule. Changes During the Period Period Ended Discount Amortized Ending Bond Liability Balances Bonds Discount on Bonds Carrying Value Payable Payable Cash Paid Interest Expense 01/01/13 12/31/13 12/31/14 12/31/15 3114

Answer 1

Face Value of Bonds = $1,000 * 550
Face Value of Bonds = $550,000

Issue Value of Bonds = $535,288

Discount on Bonds Payable = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds Payable = $550,000 - $535,288
Discount on Bonds Payable = $14,712

Annual Coupon Rate = 5.00%
Annual Coupon = 5.00% * $550,000
Annual Coupon = $27,500

Time to Maturity = 3 years

Annual Amortization of Discount = Discount on Bonds Payable / Time to Maturity
Annual Amortization of Discount = $14,712 / 3
Annual Amortization of Discount = $4,904

Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = $27,500 + $4,904
Annual Interest Expense = $32,404

Answer 1.

Changes During the Period Ending Bond Liability Balances Period Ended Cash Paid Discount Amortized 01/01/13 12/31/13 12/31/14 12/31/15 Interest Discount on Bonds Payable Carrying Value Expense Bonds Payable $ 550,000 $ 14,712 $ 535,288 32,404 $ 550,000 $ 9,808 $ 540,192 32,404 $ 550,000 $ 4,904 $ 545,096 32,404 $ 550,000 $ - $ 550,000 $ $ $ 27,500 $ 27,500 $ 27,500 $ 4,904 $ 4,904 $ 4,904 $

Answer 2, 3 and 4.

Credit $ $ Debit 535,288 14,712 $ 550,000 $ 32,404 $ 4,904 27,500 Date General Journal Jan. 01, 2013 Cash Discount on Bonds Payable Bonds Payable Dec 31, 2013 Interest Expense Discount on Bonds Payable Cash Dec. 31, 2014 Interest Expense Discount on Bonds Payable Cash Dec. 31, 2015 Interest Expense Bonds Payable Discount on Bonds Payable Cash $ 32,404 $ 4,904 27,500 $ $ 32,404 550,000 4,904 577,500

Answer 5.

Credit $ Debit 550,000 Date General Journal Jan. 01, 2015 Bonds Payable Gain on Redemption of Bonds Discount on Bonds Payable Cash ($550,000 * 98%) 6,096 4,904 539,000 $