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 $5,040,000 of five-year, 6% callable bonds dated July 1, Year 1, at a market (effective) rate of 8%, receiving cash of $4,631,210. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $380,000 as a 10-year, 8% installment note from Intexicon Bank. The note requires annual payments of $57,631, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $7,600 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 $40,879 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $40,879 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $30,400 and principal of $27,231.
Dec. 31.	Accrued $7,055 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 $40,879 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 $245,274 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 $28,222 and principal of $29,409.

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

Date		Account	Debit	Credit
Year 1
July	1	Cash	4631210
		Discount on Bonds payable	408790
		Bonds Payable		5040000
Oct	1	Cash	380000
		Notes Payable		380000
dec	31	Interest expense	7600
		Interest payable		7600
	31	Interest expense	151200
		Cash		151200
	31	Interest expense	40879
		Discount on Bonds payable		40879
	31	Income summary	199679
		interest expense		199679
Year 2
June	30	Interest expense	151200
		Cash		151200
Sept	30	Interest expense	22800
		Interest payable	7600
		Notes Payable	27231
		Cash		57631
Dec	31	Interest expense	7055
		Interest payable		7055
	31	Interest expense	151200
		Cash		151200
	31	Interest expense	40879
		Discount on bonds payable		40879
	31	Income summary	199134
		Interest expense		199134
Year 3
June	30	Bonds Payable	5040000
		Loss on redemption of bonds	144474
		Discount on bonds payable		245274
		cash ( = 5040000*0.98)		4939200
Sept	30	Interest expense	21167
		interest payable	7055
		notes payable	29409
		Cash		57631

Ans 2

a) Year 1 : $199679

b) Year 2: $199134

Ans 3.

Initial carrying amount of bonds $ 4631210

+ Discount amortized on Dec31, year 1 $40879

+ Discount amortized on Dec31, year 2 $40879

= Carrying amount of Bonds Dec31, year 2 $4712968