Question

Solve the following problem.

Entries for bonds payable, including bond redemption

CHART OF ACCOUNTSWinklevoss 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.

Date	General Journal	Debit	Credit
Year 1
Jul-01	Cash	69552279
	Discount on bonds payable	7047721
	Bonds payable		76600000
	(To record issuance of bonds)
Dec-31	Interest expense	3240193
	Discount on bonds payable		176193
	Cash (8% x $76600000 x 1/2)		3064000
	(To record semiannual interest payment)
Dec-31	Income summary	3240193
	Interest expense		3240193
	(To close interest expense account)
Year 2
Jun-30	Interest expense	3240193
	Discount on bonds payable		176193
	Cash (8% x $76600000 x 1/2)		3064000
	(To record semiannual interest payment)
Dec-31	Interest expense	3240193
	Discount on bonds payable		176193
	Cash (8% x $76600000 x 1/2)		3064000
	(To record semiannual interest payment)
Dec-31	Income summary	6480386
	Interest expense		6480386
	(To close interest expense account)
Year 3
Jun-30	Bonds payable	76600000
	Loss on redemption of bonds	4810949
	Discount on bonds payable		6342949
	Cash ($76600000 x 98/100)		75068000
	(To record redemption of bonds payable)

2(a) Interest expense in Year 1: $3240193

2(b) Interest expense in Year 2: $6480386

3. Carrying amount of the bonds as of December 31, Year 2 = $76600000 - [$7047721 - (3 x $176193)] = $76600000 - $6519142 = $70080858