Question

Entries for Bonds Payable, including bond redemption

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

Year 1
July 1. Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semiannually on December 31 and June 30.
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined
with the semiannual interest payment.
31. Closed the interest expense account.
Year 2
June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined
with the semiannual interest payment..
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined with the semiannual interest payment.
31. Closed the interest expense account.
Year 3
June 30. Recorded the redemption of the bonds, which were called at 103. The balance in the bond premium
account is $6,253,632 after payment of interest and amortization of premium have been recorded.
(Record the redemption only.)

1. Journalize the entries to record the foregoing transactions. For a compound transaction, if an amount box does not require an entry, leave it blank. When required, round amounts to the nearest dollar.

Year 1 July1


Dec.31


Dec.31

Year 2 June 30


Dec.31


Dec.31

Year 3 June 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)
Date	Account Titles and Explanation	Debit	Credit
Year 1
Jul.1	Cash	$62,817,040.00
	Premium on bonds payable		$7,817,040.00
	Bonds Payable		$55,000,000.00
Dec.31	Interest Expense	$2,084,148.00
	Premium on Bonds Payable	$390,852.00
	Cash ($55,000,000 x 9%/x 1/2)		$2,475,000.00
Dec.31	Income Summary	$2,084,148.00
	Interest Expense		$2,084,148.00
Year 2
Jun.30	Interest Expense	$2,084,148.00
	Premium on Bonds Payable	$390,852.00
	Cash ($55,000,000 x 9%/x 1/2)		$2,475,000.00
Dec.31	Interest Expense	$2,084,148.00
	Premium on Bonds Payable	$390,852.00
	Cash ($55,000,000 x 9%/x 1/2)		$2,475,000.00
Dec.31	Income Summary	$4,168,296.00
	Interest Expense		$4,168,296.00
Year3
Jun.30	Bonds Payable	$55,000,000.00
	Premium on Bonds Payable	$6,253,632.00
	Gain on Redemption of Bonds		$4,603,632.00
	Cash ($55,000,000 x 103%)		$56,650,000.00
2. Indicate the amount of the interest expense in (A) Year 1 and (B) Year 2.
a. Year 1 $	$2,084,148.00
b. Year 2 $	$4,168,296.00
3. Determine the carrying amount of the bonds as of December 31, Year 2.
$	Initial carrying amount of bonds	$62,817,040.00
	Less:
	Premium amortized on December 31 Year 1	$390,852.00
	Premium amortized on June 30, year 2	$390,852.00
	Premium amortized on December 31, year 2	$390,852.00
	Carrying amount of bonds, December 31 year 2	$61,644,484.00