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 $8,540,000 of five-year, 10% callable bonds dated July 1, Year 1, at a market (effective) rate of 11%, receiving cash of $8,218,144. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $290,000 by issuing a 10-year, 7% installment note to Intexicon Bank. The note requires annual payments of $41,289, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $5,075 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 $32,186 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $32,186 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $20,300 and principal of $20,989.
Dec. 31.	Accrued $4,708 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 $32,186 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 $193,114 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 $18,831 and principal of $22,458.

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. Journal entries

Date	Account	Debit	Credit
Year 1
Jul.1	Cash	8218144
	Discount on bonds payable	321856
	Bonds Payable		8540000
Oct.1	Cash	290000
	Notes Payable		290000
Dec.31	Interest Expense	5075
	Interest Payable		5075
Dec.31	Interest Expense	459186
	Discount on Bonds Payable		32186
	Cash ($8,540,000 * 10% * 1/2)		427000
Year 2
Jun.30	Interest Expense	459186
	Discount on Bonds Payable		32186
	Cash ($8,700,000 x 9%/x 1/2)		427000
Sept.30	Interest Expense (20300-5075)	15225
	Interest Payable	5075
	Notes Payable	20989
	Cash		41289
Dec.31	Interest Expense	4708
	Interest Payable		4708
Dec.31	Interest Expense	459186
	Discount on Bonds Payable		32186
	Cash ($8,700,000 x 9%/x 1/2)		427000
Year3
Jun.30	Bonds Payable	8540000
	Loss on Redemption of Bonds	22314
	Discount on Bonds Payable		193114
	Cash ($8,540,000 * 98%)		8369200
Sept. 30	Interest Expense (18831 - 4708)	14123
	Interest Payable	4708
	Notes Payable	22458
	Cash		41289

2. Interest expense

Year 1	464261
Year 2	938305

3. Carrying amount of the bonds as of December 31, Year 2:

Initial carrying amount of bonds	8218144
Add:
Discount amortized on December 31 Year 1	32186
Discount amortized on June 30, year 2	32186
Discount amortized on December 31, year 2	32186
Carrying amount of bonds, December 31 year 2	8314702