Question

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

Year 1
July	1	Issued $74,000,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $63,532,267. Interest is payable semiannually on December 31 and June 30.
Oct.	1	Borrowed $200,000 by issuing a six-year, 6% installment note to Nicks Bank. The note requires annual payments of $40,673, with the first payment occurring on September 30, Year 2.
Dec.	31	Accrued $3,000 of interest on the installment note. The interest is payable on the date of the next installment note payment.
	31	Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
Year 2
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
Sept.	30	Paid the annual payment on the note, which consisted of interest of $12,000 and principal of $28,673.
Dec.	31	Accrued $2,570 of interest on the installment note. The interest is payable on the date of the next installment note payment.
	31	Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
Year 3
June	30	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $9,420,961 after payment of interest and amortization of discount have been recorded. Record the redemption only.
Sept.	30	Paid the second annual payment on the note, which consisted of interest of $10,280 and principal of $30,393.

Required:

1.	Journalize the entries to record the foregoing 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.

1. Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles.

Year 1

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4
5
6
7
8
9
10

Year 2

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4
5
6
7
8
9
10
11
12

Year 3

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4
5
6
7
8

2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.

a. Year 1:
b. Year 2:

3. Determine the carrying amount of the bonds as of December 31, Year 2.

Answer 1

1	Date	Account titles and explanation					Debit	Credit
	Year 1
	July 1.	Cash					63532267
		Discount on issue of bonds			(74000000-63532267)		10467733
		Bonds payable						74000000
		(Bonds issued at discount)
	Oct 1.	Cash					200000
		Notes payable						200000
		(Borrowed from bank)
	Dec 31-Note	Interest expense					3000
		Interest payable						3000
		(Interest due on the note)
	Dec 31-Bond	Interest expense			(4070000+261693)		4331693
		Discount on issue of bonds						261693
		Cash			(74000000*11%*6/12)			4070000
		(Semi-annual interest on bond paid)
	Year 2
	June 30.	Interest expense			(4070000+261693)		4331693
		Discount on issue of bonds						261693
		Cash			(74000000*11%*6/12)			4070000
		(Semi-annual interest on bond paid)
	Sept 30.	Interest expense			(12000-3000)		9000
		Interest payable					3000
		Notes payable					28673
		Cash						40673
		(Installment on notes paid)
	Dec 31-Note	Interest expense					2570
		Interest payable						2570
		(Interest due on the note)
	Dec 31-Bond	Interest expense			(4070000+261693)		4331693
		Discount on issue of bonds						261693
		Cash			(74000000*11%*6/12)			4070000
		(Semi-annual interest on bond paid)
	Year 3
	June 30.	Bonds payable					74000000
		Loss on redemption of bonds			(Balancing figure)		7940961
		Discount on issue of bonds						9420961
		Cash			(74000000*98%)			72520000
		(Redemption of bonds)
	Sept 30.	Interest expense			(10280-2570)		7710
		Interest payable					2570
		Notes payable					30393
		Cash						40673
		(Installment on notes paid)
2	Interest expense
					Year 1	Year 2
					$	$
	On bonds				4331693	8663386
						(4331693*2)
	On notes				3000	11570
						(9000+2570)
	Total				4334693	8674956
3	Carrying amount of the bonds as on Dec 31,Year 2=Bond issue price+Discount amortized till Dec 31,year 2=63532267+(261693*3)=$ 64317346