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

Answer:

1.		2016
		July 1	Cash		63,532,267
			Discount on Bonds Payable		10,467,733
			Bonds Payable				74,000,000
		Oct. 1	Cash		200,000
			Notes Payable				200,000
		Dec. 31	Interest Expense		3,000
			Interest Payable				3,000
		Dec. 31	Interest Expense				4,331,693
			Cash				4,070,000
			Discount on Bonds Payable				261,693
		Dec. 31	Income Summary		4,334,693
			Interest Expense				4,334,693
		2017
		June 30	Interest Expense		4,331,693
			Cash				4,070,000
			Discount on Bonds Payable				261,693
		Sept. 30	Notes Payable		28,673
			Interest Expense		9,000
			Interest Payable		3,000
			Cash				40,673
		Dec. 31	Interest Expense		2,570
			Interest Payable				2,570
		Dec. 31	Interest Expense		4,331,693
			Cash				4,070,000
			Discount on Bonds Payable				261,693
		Dec. 31	Income Summary		8,674,956
			Interest Expense				8,674,956
		2018
		June 30	Bonds Payable		74,000,000
			Loss on Redemption of Bonds		7,940,961
			Cash				72,520,000
			Discount on Bonds Payable				9,420,961
		Sept. 30	Notes Payable		30,393
			Interest Expense		7,710
			Interest Payable		2,570
			Cash				40,673
2.
	a.	2016 interest expense:		$ 4,334,693
	b.	2017 interest expense:		$ 8,674,956
3.
		Initial carrying amount of bonds			$ 63,532,267
		Discount amortized on December 31, 2016			261,693
		Discount amortized on June 30, 2017			261,693
		Discount amortized on December 31, 2017			261,693
		Carrying amount of bonds, December 31, 2017		$ 64,317,346