Question

Entries for Bonds Payable and Installment Note Transactions

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

Year 1
July 1.	Issued $3,410,000 of five-year, 7% callable bonds dated July 1, Year 1, at a market (effective) rate of 9%, receiving cash of $3,140,176. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $380,000 by issuing a 10-year, 8% installment note to Intexicon Bank. The note requires annual payments of $57,631, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $7,600 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $26,983 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $26,983 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $30,400 and principal of $27,231.
Dec. 31.	Accrued $7,055 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $26,983 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 $161,894 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 $28,222 and principal of $29,409.

Required:

1. Journalize the entries to record the foregoing transactions. For compound transactions, if an amount box does not require an entry, leave it blank or enter "0". When required, round your answers to the nearest dollar.

Date	Account	Debit	Credit
Year 1
July 1
Oct. 1
Dec. 31-Note
Dec. 31-Bond
Year 2
June 30
Sept. 30
Dec. 31-Note
Dec. 31-Bond
Year 3
June 30
Sept. 30

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	Debit	Credit
Year 1		$	$
July 1	Cash	3,140,176
	Discount on Bonds Payable	269,824
	Bonds Payable		3,410,000
Oct 1	Cash	380,000
	Notes Payable		380,000
Dec 31	Interest Expense	7,600
	Interest Payable		7,600
Dec 31	Interest Expense	146,333
	Discount on Bonds Payable		26,983
	Cash		119,350
Year 2
June 30	Interest Expense	146,333
	Discount on Bonds Payable		26,983
	Cash		119,350
Sept 30	Interest Expense	22,800
	Interest Payable	7,600
	Notes Payable	27,231
	Cash		57,631
Dec 30	Interest Expense	7,055
	Interest Payable		7,055
Dec 31	Interest Expense	146,333
	Discount on Bonds Payable		26,983
	Cash		119,350
Year 3
June 30	Interest Expense	146,333
	Discount on Bonds Payable		26,983
	Cash		119,350
June 30	Bonds Payable	3,410,000
	Loss on Redemption of Bonds	93,692
	Discount on Bonds Payable		161,892
	Cash		3,341,800
Sept 30	Interest Expense	21,167
	Interest Payable	7,055
	Notes Payable	29,409
	Cash		57,631

2. a.

	Year 1
Interest on Bonds	$ 146,333
Interest on Notes Payable	7,600
Total Interest Expense	$ 153,933

b.

	Year 2
Interest on Bonds	$ 292,666
Interest on Notes Payable	29,855
Total Interest Expense	$ 322,521

3.

Issue Price of Bonds Payable	$ 3,140,176
Add: Discount Amortized	80,949
Carrying amount of Bonds Payable as at December 31, Year 2	$ 3,221,125