Question

On January 1, 2018, Methodical Manufacturing issued 100 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, 2020. On the issue date, the market interest rate was 4.00 percent, so the total proceeds from the bond issue were $102,776. Methodical uses the simplified effective interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.

Required:

1. 1. Prepare a bond amortization schedule.
2. 2-5. Prepare the required journal entries to record the bond issue, interest payments on December 31, 2018 and 2019, interest and face value payment on December 31, 2020, and bond retirement. Assume the bonds are retired on January 1, 2020, at a price of 102.

Answer 1

Solution 1:

Bond Amortization Schedule - Methodical Manufacturing
Date	Cash Paid	Interest Expense	Premium Amortized	Unamortized premium	Carrying Value
01-Jan-18				$2,776	$1,02,776
31-Dec-18	$5,000	$4,111	$889	$1,887	$1,01,887
31-Dec-19	$5,000	$4,075	$925	$963	$1,00,963
31-Dec-20	$5,000	$4,038	$962	$0	$1,00,000

Solution 2 to 5:

Journal Entries - Methodical Manufacturing
Date	Particulars	Debit	Credit
01-Jan-18	Cash A/c Dr	$1,02,776
	To bonds payable		$1,00,000
	To Preimum on bond payable		$2,776
	(Being bond issued at premium)
31-Dec-18	Interest Expense Dr	$4,111
	Preimum on bond payable Dr	$889
	To Cash		$5,000
	(To record interest payment)
31-Dec-19	Interest Expense Dr	$4,075
	Preimum on bond payable Dr	$925
	To Cash		$5,000
	(To record interest payment)
31-Dec-20	Interest Expense Dr	$4,038
	Preimum on bond payable Dr	$962
	To Cash		$5,000
	(To record interest payment)
31-Dec-20	Bond Payable Dr	$1,00,000
	To Cash		$1,00,000
	(To record bond repayment at maturity)
Journal Entries - Methodical Manufacturing
Date	Particulars	Debit	Credit
01-Jan-20	Bond Payable Dr	$1,00,000
	Premium on bond Payable Dr	$962
	Loss on retirement of bond Dr	$1,038
	To Cash ($100,000*102%)		$1,02,000
	(To record early retirement of bonds)