PA10-7 (Supplement 10B) Recording Bond Issue, Interest Payments (Effective-Inter

Question

PA10-7 (Supplement 10B) Recording Bond Issue, Interest Payments (Effective-Interest Amortization), and Early Bond Retirement LO 10-S2] On January 1, 2015, Surreal Manufacturing issued 690 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, 2017. On the issue date, the market interest rate was 4 percent, so the total proceeds from the bond issue were $670,855. Surreal uses the effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year Required Prepare a bond amortization schedule. (Round your answers to the nearest whole dollar Make sure that the Carrying value equals face value of the bond in the last period. Interest expense in the last period will result in the amount in Discount Amortized equaling Discount on Bonds Payable.) Changes During the Period Ending Bond Liability Balances Discount on Bonds Payable Period Interest ense Discount Amortized Cash Paid Bonds Payable Carrying Value Ended 01/01/15 12/31/15 12/31/16 12/31/17 0 0 0 0 0 0

Explanation / Answer

1 Changes during the period Ending Bond Liability Balances Period end Interest expense (4% * Carrying Value) Cash paid (3% of Bond FV) Discount amortized Bonds payable Discount on Bonds payable Carrying value 01/01/2015 $690,000 $19,145 $670,855 12/31/15 $26,834 $20,700 $6,134 $690,000 $13,011 $676,989 12/31/16 $27,080 $20,700 $6,380 $690,000 $6,631 $683,369 12/31/17 $27,335 $20,700 $6,635 $690,000 -$4 $690,004 2. Journal Entry Date Account Tittle Debit Credit Jan-1-15 Cash 670855 Discount on Bonds payable 19145     Bonds payable 690000 Dec-31-15 Interest expense 26834 Discount on Bonds payable 6134        Cash 20700 Dec-31-16 Interest expense 27080 Discount on Bonds payable 6631        Cash 20700 Dec-31-17 Interest expense 27335 Discount on Bonds payable 6631 ( Round figure)        Cash 20704 Jan-1-18 Bonds payable 690000 Loss on retirement of bonds 6900                 Cash 696900

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