Question

On January 1, 2018, Surreal Manufacturing issued 570 bonds, each with a face value of $1,000, a stated interest rate of 3 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 4 percent so the for any rounding errors when recording interest in the final year. Required: from the bond issue were $554,184. Surreal uses the simplified effective-interest bond amortization method and adjusts 8:38 1. Prepare a bond amortization schedule. 2-5. Prepare the journal entries to record the bond issue, the interest payments on December 31 2018 and 2019, the interest and face value payment on December 31, 2020 and the bond retirement.

Answer 1

Answer:

Period Carrying  cash outlay Interest Amort E.Carrying

1      554,184 17,100 22,167.36 5,067.36  559,251

2      559,251 17,100 22,370.05 5,270.05         564,521

3      564,521 17,100 22,580.86 5,480.86         570,002

journal entries

cash                                  554,184 debit

discount on bond payable 15,816 debit

          bonds payable                              570,000 credit

--to record issuance of the bonds--

interest expense 22,167.36 debit  

discount on BP                   5067.36 credit

cash                                   17100      credit

--to record interest payment--

bonds payable 570,000       debit

interest expense 22,580.86 debit

     discount on bonds payable 5,480.86 credit

    cash                                       587,100    credit

--to record retirement of the bonds

Explanation:

Under the effective interest method we determinate the interest expense by multiplying the carrying value of the bond by the market rate.

554,184 x 4% = 22,167.36

Then we compare with the actual cash payment:

570 bonds x 1,000 dollars each x 3% = 17,100 dollars

The difference will be the amortization on the bonds discount.

This, will generate a new carrying value so the process is repeated until maturity.

The journal entries will be as follows:

on issuance:

we receive cash, so we debited.

We assume a liability so tis credited and we also create the discount account to adjust the face value of the bond to what we really get for them

on interest payment:

we credit the cash outlay in favor of the bondholders

we debit the interest expense generate for the effective rate method

and we credit the discount by the difference

retirement

we credit the total cash outlay (principal + interest of the period)

we write-off the bonds payable and the bond discount

we reocgnize the last interest expense under debit