Question

Entries for Bonds Payable and Installment Note Transactions

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

Year 1

July 1.	Issued $8,890,000 of five-year, 7% callable bonds dated July 1, Year 1, at a market (effective) rate of 8%, receiving cash of $8,529,470. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $200,000 by issuing a 10-year, 6% installment note to Nicks Bank. The note requires annual payments of $27,174, 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 $36,053 is combined with the semiannual interest payment.
Year 2 June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $36,053 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 $15,174.
Dec. 31.	Accrued $2,772 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 $36,053 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 $216,318 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 $11,090 and principal of $16,084.

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

Required:

Round all amounts to the nearest dollar.

1. Journalize the entries to record the foregoing transactions. If an amount box does not require an entry, leave it blank.

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

Requirement-1: Journal Entries

Date	Account Title and Explanation	Debit $	Credit $
Year 1
July 1	Cash	8,529,470
	Discount on bonds payable	360,530
	Bonds Payable		8,890,000
	(To record issuance of bonds)
Oct.1	Cash	200,000
	Notes Payable		200,000
	(To record notes payable)
Dec.31	Interest Expense	3,000
	Interest Payable		3,000
	(To record accrual of interest expense on notes payable)
Dec.31	Interest Expense	347,203
	Discount on Bonds Payable		36,053
	Cash ($8,890,000 x 7%/x 1/2)		311,150
	(To record payment of bond interest)
Year 2
June 30	Interest Expense	347,203
	Discount on Bonds Payable		36,053
	Cash ($8,890,000 x 7%/x 1/2)		311,150
	(To record payment of bond interest)
Sept.30	Interest Expense (12,000-3,000)	9,000
	Interest Payable	3,000
	Notes Payable	15,174
	Cash		27,174
	(To record payment of interest and principal)
Dec .31	Interest Expense	2,772
	Interest Payable		2,772
	(To record accrual of interest expense on notes payable)
Dec .31	Interest Expense	347,203
	Discount on Bonds Payable		36,053
	Cash ($8,890,000 x 7%/x 1/2)		311,150
	(To record payment of bond interest)
Year 3
June 30	Bonds Payable	8,890,000
	Loss on Redemption of Bonds	38,518
	Discount on Bonds Payable		216,318
	Cash (8,890,000 x 98%)		8,712,200
	(To record redemption of bonds)
Sept.30	Interest Expense (11,090-2,772)	8,318
	Interest Payable	2,772
	Notes Payable	16,084
	Cash		27,174
	(To record payment of interest and principal)

Requirement-2: Amount of Interest Expense

	Interest Expense	Calculation
Year 1	$ 350,203	(3,000+347,203)
Year 2	$ 706,178	(347,203+9,000+2,772+347,203)

Requirement-3: Carrying Amount of Bonds

Carrying Amount of the Bonds as of December 31, Year 2.
Initial carrying amount of bonds	8,529,470
Add: Discount amortized on December 31 Year 1	36,053
Discount amortized on June 30 Year 2	36,053
Discount amortized on December 31 Year 2	36,053
Carrying amount of bonds, December 31 year 2	$ 8,637,629

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