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 $4,090,000 of five-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $3,795,978. 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 $29,402 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $29,402 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 $29,402 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 $176,414 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	Cash
	Discount on Bonds Payable
	Bonds Payable
Oct. 1	Cash
	Discount on Bonds Payable
Dec. 31-Note	Interest Expense
	Notes Payable
Dec. 31-Bond	Interest Expense
	Discount on Bonds Payable
	Cash
Year 2
June 30	Interest Expense
	Discount on Bonds Payable
	Cash
Sept. 30	Interest Expense
	Interest Payable
	Notes Payable
	Cash
Dec. 31-Note	Interest Expense
	Interest Payable
Dec. 31-Bond	Interest Expense
	Discount on Bonds Payable
	Cash
Year 3
June 30	Bonds Payable
	Interest Expense
	Discount on Bonds Payable
	Cash
Sept. 30	Interest Expense
	Interest Payable
	Notes Payable
	Cash

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. Required journal entries are as prepared below:

Date	Account	L.F	Debit	Credit
Year 1
Jul-01	Cash		3,795,978
	Discount on Bonds Payable		294,022
	Bonds Payable			4,090,000
Oct. 1	Cash		360,000
	Notes Payable			360,000
Dec. 31-Note	Interest Expense (360,000*6%*3/12)		5,400
	Interest Payable			5,400
Dec. 31-Bond	Interest Expense		254,352
	Discount on Bonds Payable			29,402
	Cash (4,090,000*11%*6/12)			224,950
Year 2
Jun-30	Interest Expense		254,352
	Discount on Bonds Payable			29,402
	Cash (4,090,000*11%*6/12)			224,950
Sept. 30	Interest Expense		16,200
	Interest Payable		5,400
	Notes Payable		27,312
	Cash			48,912
Dec. 31-Note	Interest Expense		4,990
	Interest Payable			4,990
Dec. 31-Bond	Interest Expense		254,352
	Discount on Bonds Payable			29,402
	Cash (4,090,000*11%*6/12)			224,950
Year 3
Jun-30	Interest Expense		254,352
	Discount on Bonds Payable			29,402
	Cash (4,090,000*11%*6/12)			224,950
Jun-30	Bonds Payable		4,090,000
	Discount on Bonds Payable		176,414
	Gain on redemption of bond			258,214
	Cash (4,090,000*.98)			4,008,200
Sept. 30	Interest Expense		14,971
	Interest Payable		4,990
	Notes Payable		28,951
	Cash			48,912

2. Amount of the interest expense in (a) Year 1 and (b) Year 2 is:

Year 1
Interest on bonds	254,352
Interest on Notes	5,400	259,752
Year 2
Interest on bonds	508,704
Interest on Notes	21,190	529,894

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

Bond carrying value Year 0	3,795,978
Add: Discount amortized in
Year 1	29,402
Year 2	29,402
Carrying Value Year 2	3,854,782