Question

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

Year 1
July	1	Issued $76,600,000 of 20-year, 8% callable bonds dated July 1, Year 1, at a market (effective) rate of 9%, receiving cash of $69,552,279. Interest is payable semiannually on December 31 and June 30.
Oct.	1	Borrowed $220,000 by issuing a six-year, 7% installment note to Nicks Bank. The note requires annual payments of $46,155, with the first payment occurring on September 30, Year 2.
Dec.	31	Accrued $3,850 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 $176,193 is combined with the semiannual interest payment.
Year 2
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $176,193 is combined with the semiannual interest payment.
Sept.	30	Paid the annual payment on the note, which consisted of interest of $15,400 and principal of $30,755.
Dec.	31	Accrued $3,312 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 $176,193 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 $6,342,949 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 $13,247 and principal of $32,908.

Required:

1.	Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles.
2.	Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
3.	Determine the carrying amount of the bonds as of December 31, Year 2.

Answer 1

Ans: Winklevoss Inc.

   Journal Entries

Date	Particulars		Dr. ($)	Cr. ($)
Year 1. 1.July	Cash A/c Dr. To 8% Callable Bond A/c    To discount on Issue of Bond A/c (being entry for issue of 8% bond)		76,600,000	69,552,279 7,047,721
1.Oct	Cash A/c Dr. To 7% Note payable A/c ( Being entry for Issue of 7% Note Payable)		220,000	220,000
31.Dec	Interest Expenses A/c Dr. To Interest payable A/c (Being entry for recording interest expense on 7% note payable)		3,850	3,850
31.Dec	Interest Expenses A/c Dr. To Cash A/c    To 8% Callable Bond A/c (Being entry for the payment of Interest)		3,129,853	3,064,000 65,853
31.Dec	Discount on Bond A/c Dr. To Profit and loss A/c (being entry for Amortization of discount on issue of Bonds)		176,193	176,193
31.Dec	Interest Expenses A/c Dr. To Profit & Loss A/c (Being Entry for Interest Expenses Transfer to Profit And Loss A/c)		3,133,703	3,133,703
Year 2
30.June	Interest Expenses A/c Dr. To Cash A/c    To 8% Callable Bond A/c (Being entry for the payment of Interest)		3,132,816	3,064,000 68,816
30.Sep	Interest Expenses A/c Dr. 7% Note payable A/c Dr.    To Cash A/c (Being Entry for payment of Interest )		15,400 30,755	46,155
30.Sep	Interest payable A/c Dr. To Interest expenses A/c (being Interest payable sett off with Interest Expenses A/c)		3,850	3,850
31.Dec	Interest Expenses A/c Dr. To Interest payable A/c (Being entry for recording interest expense on 7% note payable)		3,312	3,312
31.Dec	Interest Expenses A/c Dr. To Cash A/c    To 8% Callable Bond A/c (Being entry for the payment of Interest)		3,135,913	3,064,000 $71,913
31.Dec	Discount on Bond A/c Dr. To Profit and loss A/c (being entry for Amortization of discount on issue of Bonds)		176,193	176,193
31.Dec	Interest Expenses A/c Dr. To Profit & Loss A/c (Being Entry for Interest Expenses Transfer to Profit And Loss A/c)	($3,132,816+$3,135,913+$3,312-$3,850+$15,400)	6,283,591	6,283,591
30.June	Interest Expenses A/c Dr. To Cash A/c    To 8% Callable Bond A/c (Being entry for the payment of Interest)		3,139,149	3,064,000 75,149
30.June	8% Callable Bond A/c Dr. To Cash A/c To Discount on Issue of Bond A/c (being entry for redemption of Bonds)	($6,695,335-$6,342,949)=$352,386 $352,386(100/2) $17,619,297	17,619,297	17,266,911 352,386
30.Sep	Interest Expenses A/c Dr. 7% Note payable A/c Dr.    To Cash A/c (Being Entry for payment of Interest)		13,247 32,908	46,155
30.Sep	Interest payable A/c Dr. To Interest expenses A/c (being Interest payable sett off with Interest Expenses		3,312	3,312

Interest expenses For Year 1 and Year 2

Year	Interest Expenses ($)
1	3,133,703
2	6,283,591

3) Carry Amount of Bond at the end of 2nd Year

Payment	Interest Expenses	Cash Paid	Increase in Carrying Amount	Carrying Amount
				$69,552,279
1	$3,129,853	$3,064,000	$65,853	$69,618,132
2	$3,132,816	$3,064,000	$68,816	$69,686,947
3	$3,135,913	$3,064,000	$71,913	$69,758,860

Amount due in bond A/c is $69,758,860