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 $1,370,000 of five-year, 11% callable bonds dated July 1, Year 1, at a market rate of 13%, receiving cash of $1,271,513. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $360,000 by issuing a 10-year, 6% installment note to Intexicon Bank. The note requires annual payments of $48,912, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $5,400 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 $9,849 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $9,849 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $21,600 and principal of $27,312.
Dec. 31.	Accrued $4,990 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 $9,849 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 $59,093 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 $19,961 and principal of $28,951.

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

Answer to Question No 1:

Date	Account Title & Explanation	Debit($)	Credit($)
Year 1:
July 1	Cash A/c	12,71,513
	Discount on Bond Payable	98,487
	To, Bond Payable		13,70,000
	(To record issue of Bonds at discount)
Oct 1	Cash	3,60,000
	To, Note Payable		3,60,000
	(To record issue of 6% Notes for cash)
Dec 31	Interest Expense	5,400
	To, Interest Payable		5,400
	(To record interest accrued on installment note)
Dec 31	Interest Expenses	75,350
	To, Cash		75,350
	[$13,70,000*11%*1/2]
	(To record interest payment )
Dec 31	Interest Expense	9,849
	To, Discount on Bond Payable		9,849
	(To record ammortisation of bonds)

Date	Account Title & Explanation	Debit($)	Credit($)
Year 2:
June 30	Interest Expenses	75,350
	To, Cash		75,350
	[$13,70,000*11%*1/2]
	(To record interest payment )
Sept 30	Interest Expense	16,200
	Interest Payable	5,400
	Notes Payable	27,312
	To, Cash		48,912
	(To record annual payment on note)
Dec 31	Interest Expenses	4,990
	To, Interest Payable		4,990
	(To record interest accrued on installment note)
Dec 31	Interest Expense	9,849
	To, Discount on Bond Payable		9,849
	(To record ammortisation of bonds)

Date	Account Title & Explanation	Debit($)	Credit($)
Year 3:
June 30	Bond Payable	13,70,000
	To, Discount on Bond Payable		27400
	To, Cash		13,42,600
	(To record redemption of bond at discount)
	[ Balance in discount account is missing so unable to find gain or loss on redemption of bonds]
Sept 30	Interest Expense	14,561
	Interest Payable	5,400
	Notes Payable	28,951
	To, Cash		48,912
	(To record annual payment on note)

Answer to Question 2:

The amount of Interest in Year 1:($5,400 + $75,350 + $9,849) = $ 90,599

The amount of Interest in Year 2:( $75,350 + $16,200 + $4,990 + $9,849) =$1,06,389

Answer to Question 3:

Initial Carrying Amount of Bonds $12,71,513

Discount ammortized in Year 1 $ 9,849

Discount ammortized in Year 2 $ 9,849

Carrying Amount of bond in end of Year 2 = $12,91,211