On January 1, 2015, Methodical Manufacturing issued 100 bonds, each with a face
ID: 2480629 • Letter: O
Question
On January 1, 2015, Methodical Manufacturing issued 100 bonds, each with a face value of $1,000, a stated interest rate of 8 percent paid annually on December 31, and a maturity date of December 31, 2017. On the issue date, the market interest rate was 7.25 percent, so the total proceeds from the bond issue were $101,959. Methodical uses the effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.
Prepare a bond amortization schedule including date, interest expense, cash paid, amortized premium or discount, remaining premium or discount, and carrying value.
Prepare the journal entry to record the bond issue, interest payments on December 31, 2015 and 2016, interest and face value payment on December 31, 2017 and the bond retirement. Assume the bonds are retired on January 1, 2017, at a price of 102.
Explanation / Answer
A B C D E F G Date Interest Payment Stated 8%* FV Interest Expense Mkt 7.25%*Previous BV in Col G Amortisation of Bond Premium (C)-(B) Credit Balance in Bond Premium A/c Credit Balance in Bond Payable A/c Book Value of Bonds(F)+E) 1-Jan-15 0 - - 1,959 100,000 101,959 31-Dec-15 8000 7,392 (608) 1,351 100,000 101,351 31-Dec-16 8000 7,348 (652) 699 100,000 100,699 31-12-17 8000 7,301 (699) (0) 100,000 100,000 1-Jan-15 Bnk A/c Dr 101959 Bond Payabe 100000 Premium on Bond Payable 1959 31-Dec-15 Interest Expense 7392 Premium on BondPayable 608 To Cash 8000 31-Dec-16 Interest Expense 7348 Premium on BondPayable 652 To Cash 8000 31-Dec-16 Interest Expense 7301 Premium on BondPayable 699 To Cash 8000 1-Jan-17 BondPayable A/c 100000 Premium on Redemption 2000 To Cash 102000
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