Question

Solve the follwing problem.

Entries for bonds payable, including bond redemption

CHART OF ACCOUNTS
Winklevoss Inc.
General Ledger
ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable 122 Allowance for Doubtful Accounts 126 Interest Receivable 127 Notes Receivable 131 Merchandise Inventory 141 Office Supplies 142 Store Supplies 151 Prepaid Insurance 191 Land 192 Store Equipment 193 Accumulated Depreciation-Store Equipment 194 Office Equipment 195 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 221 Salaries Payable 231 Sales Tax Payable 232 Interest Payable 241 Notes Payable 251 Bonds Payable 252 Discount on Bonds Payable 253 Premium on Bonds Payable EQUITY 311 Common Stock 312 Paid-In Capital in Excess of Par-Common Stock 315 Treasury Stock 321 Preferred Stock 322 Paid-In Capital in Excess of Par-Preferred Stock 331 Paid-In Capital from Sale of Treasury Stock 340 Retained Earnings 351 Cash Dividends 352 Stock Dividends 390 Income Summary	REVENUE 410 Sales 610 Interest Revenue 611 Gain on Redemption of Bonds EXPENSES 510 Cost of Merchandise Sold 515 Credit Card Expense 516 Cash Short and Over 521 Sales Salaries Expense 522 Office Salaries Expense 531 Advertising Expense 532 Delivery Expense 533 Repairs Expense 534 Selling Expenses 535 Rent Expense 536 Insurance Expense 537 Office Supplies Expense 538 Store Supplies Expense 541 Bad Debt Expense 561 Depreciation Expense-Store Equipment 562 Depreciation Expense-Office Equipment 590 Miscellaneous Expense 710 Interest Expense 711 Loss on Redemption of Bonds

The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year:

Year 1
July	1	Issued $76,600,000 of 20-year, 8% callable bonds dated July 1, Year 1, at a market (effective) rate of 9%, receiving cash of $69,552,279. Interest is payable semiannually on December 31 and June 30.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $176,193 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
Year 2
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $176,193 is combined with the semiannual interest payment.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $176,193 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
Year 3
June	30	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $6,342,949 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)

Required:

1.	Journalize the entries to record the transactions. Round all amounts to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles.
2.	Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
3.	Determine the carrying amount of the bonds as of December 31, Year 2.

Answer 1

1	Journal Entries
Year 1
Jul-01	Bank		Dr.	69552279
	Discount on Bonds issued		Dr.	7047721
	Bonds Payables		Cr.		76600000
	(Being bonds issued at a discount)
Dec-31	Interest Expense		Dr.	3064000
	Bank		Cr.		3064000
	(Being semi annual interest paid)
W. No.	Calculation of Interest Expense
	Bonds Face value=		76600000
	Annual rate of interest=		8%
	Half-yearly rate of interest=		4.00%
	Interest for half-year=		76600000*4%
			3064000
Dec-31	Profit& Loss A/c		Dr.	176193
	Discount on Bonds issued		Cr.		176193
	(Beind discount w/off)
Dec-31	Profit& Loss A/c		Dr.	3064000
	Interest Expense		Cr.		3064000
	(Being Interest charged to Profit & Loss A/c)
Year 2
Jun-30	Interest Expense		Dr.	3064000
	Bank		Cr.		3064000
	(Being semi annual interest paid)
W. No.	Calculation of Interest Expense
	Bonds Face value=		76600000
	Annual rate of interest=		8%
	Half-yearly rate of interest=		4.00%
	Interest for half-year=		76600000*4%
			3064000
Jun-30	Profit& Loss A/c		Dr.	176193
	Discount on Bonds issued		Cr.		176193
	(Beind discount w/off)
Dec-31	Interest Expense		Dr.	3064000
	Bank		Cr.		3064000
	(Being semi annual interest paid)
W. No.	Calculation of Interest Expense
	Bonds Face value=		76600000
	Annual rate of interest=		8%
	Half-yearly rate of interest=		4.00%
	Interest for half-year=		76600000*4%
			3064000
Dec-31	Profit& Loss A/c		Dr.	176193
	Discount on Bonds issued		Cr.		176193
	(Beind discount w/off)
Dec-31	Profit& Loss A/c		Dr.	6128000
	Interest Expense		Cr.		6128000
	(Being Interest charged to Profit & Loss A/c)
Year 3
Jun-30	Bonds Payables		Dr.	76600000
	Bank		Cr.		75068000
	Profit & Loss A/c		Cr.		1532000
	(Being bonds redeemed)
Note: Assuming all the bonds are redeemed having face value of $ 100 each
	Amount of Bonds redeemed=		76600000*98%
2	Interest Expense is the amount that is charged to Profit & Loss A/c
	Year-1	Interest Expense	3064000
		Discount on Bonds issued	176193
	Year-2	Interest Expense	6128000
		Discount on Bonds issued	352386
3	Carrying amount of bonds as of December 31, year 2 is the amount that is reflecting in Bonds payable account of the company less unamortized discount
	Bonds Payables=		76600000
	Unamortised Discount=
	Total Discount=	7047721
	Less: Discount amortised in year-1	176193
	Less: Discount amortised in year-2	352386	6519142
	Carrying amount of bonds at December 31, year 2=		70080858