Question

Entries for Bonds Payable, including bond redemption The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year: Year 1 July 1. Issued $7,000,000 of five-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $6,496,782. Interest is payable semiannually on December 31 and June 30. Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $50,322 is combined with the semiannual interest payment. Dec. 31. Closed the interest expense account. Year 2 June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $50,322 is combined with the semiannual interest payment. Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $50,322 is combined with the semiannual interest payment. Dec. 31. Closed the interest expense account. Year 3 June 30. Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $301,930 after payment of interest and amortization of discount have been recorded. (Record the redemption only.) Required: 1. Journalize the entries to record the foregoing 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. 2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2. a. Year 1 $ 1,010,644 b. Year 2 $ 1,010,644 3. Determine the carrying amount of the bonds as of December 31, Year 2.

Answer 1

1.

Date	General Journal	Debit	Credit
Year 1
Jul-01	Cash	6496782
	Discount on bonds payable	503218
	Bonds payable		7000000
	(To record issuance of bonds)
Dec-31	Interest expense	435322
	Discount on bonds payable		50322
	Cash (11% x $7000000 x 1/2)		385000
	(To record semiannual interest payment)
Dec-31	Income summary	435322
	Interest expense		435322
	(To close interest expense account)
Year 2
Jun-30	Interest expense	435322
	Discount on bonds payable		50322
	Cash (11% x $7000000 x 1/2)		385000
	(To record semiannual interest payment)
Dec-31	Interest expense	435322
	Discount on bonds payable		50322
	Cash (11% x $7000000 x 1/2)		385000
	(To record semiannual interest payment)
Dec-31	Income summary	870644
	Interest expense		870644
	(To close interest expense account)
Year 3
Jun-30	Bonds payable	7000000
	Loss on redemption of bonds	161930
	Discount on bonds payable		301930
	Cash ($7000000 x 98/100)		6860000
	(To record redemption of bonds payable)

2(a) Interest expense in Year 1: $435,322

(b) Interest expense in Year 2: $870,644

3. Carrying amount of the bonds as of December 31, Year 2 = $7000000 - [$503218 - (3 x $50322)] = $7000000 - $352252 = $6647748