Question

The following transactions were completed by Hobson Inc., whose fiscal year is the calendar year: 2010 July 1. Issued $18,000,000 of five-year, 10% callable bonds dated July 1, 2010, at an effective rate of 12%, receiving cash of $16,675,184. Interest is payable semiannually on December 31 and June 30. Oct. 1. Borrowed $400,000 as a 10-year, 7% installment note from Marble Bank. The note requires annual payments of $56,951, with the first payment occurring on September 30, 2011. Dec. 31. Accrued $7,000 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. 31. Recorded bond discount amortization of $132,482, which was determined using the straight-line method. 31. Closed the interest expense account. 2011 June 30. Paid the semiannual interest on the bonds. Sept. 30. Paid the annual payment on the note, which consisted of interest of $28,000 and principal of $28,951. Dec. 31. Accrued $6,493 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. 31. Recorded bond discount amortization of $264,964, which was determined using the straight-line method. 31. Closed the interest expense account. 2012 June 30. Recorded the redemption of the bonds, which were called at 97. The balance in the bond discount account is $794,888 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 $25,973 and principal of $30,978. Instructions 1. Journalize the entries to record the foregoing transactions. 2. Indicate the amount of the interest expense in (a) 2010 and (b) 2011. 3. Determine the carrying amount of the bonds as of December 31, 2011.

Answer 1

July 1. Issued $18,000,000 of five-year, 10% callable bonds dated July 1, 2010, at an effective rate of 12%, receiving cash of$16,675,184. Interest is payable semiannually on December 31 andJune 30.

01 Jul 2010

Cash Dr $16,675,184
Discount on Bonds Payable Dr $1,324,816
Bonds Payable Cr $18000,000

Oct. 1.  Borrowed $400,000 as a 10-year, 7% installment note fromMarble Bank.
The note requires annual payments of $56,951, with the firstpayment occurring on September 30, 2011.

01 Oct 2010

Cash Dr 400,000
Note Payable Cr 400,000

Dec. 31. Accrued $7,000 of interest on the installment note. Theinterest is payable on the date of the next installment notepayment.

31 Dec 2010

Int Expense Dr 7000
Int accrured on Note Payable Cr 7000

31 Dec. Paid the semiannual interest on the bonds. ($18,000,000*10%/2=$900,000)

31 Dec 2010

Int Expense Dr 900,000
Cash Cr 900,000

31 Dec. Recorded bond discount amortization of $132,482, which wasdetermined using the straight-line method.

31 Dec 2010

Interest Expense Dr $132,482
Discount on Bonds Payable Cr $132,482

31 Dec. Closed the interest expenseaccount.($7000+$900,000+$132,482)

31 Dec 2010

Income Summary Dr $1039,482
Interest Expense Cr $1039,482

2011
June 30. Paid the semiannual interest on the bonds.

30 Jun 2011

Interest Expense Dr 900,000
Cash Cr 900,000

Sept. 30. Paid the annual payment on the note, which consisted ofinterest of $28,000 and principal of $28,951.
30 Sep 2011

Interest Expense Dr 21,000
Int accrured on Note Payable Dr 7,000
Notes Payable Dr 28,951
Cash Cr 56,951

Dec. 31. Accrued $6,493 of interest on the installment note. Theinterest is payable on the date of the next installment notepayment.
31 Dec 2011

Int Expense Dr 6,493
Int accrured on Note Payable Cr 6,493

31 Dec. Paid the semiannual interest on the bonds.
31 Dec 2011

Interest Expense Dr 900,000
Cash Cr 900,000

31 Dec. Recorded bond discount amortization of $264,964, which wasdetermined using the straight-line method.(Annual Disc amortizationis 132,482. SO total Disc amortized at end of Y2 = 132,482*2 =264,964)
31 Dec 2011

Interest Expense Dr $132,482
Discount on Bonds Payable Cr $132,482

31 Dec. Closed the interest expense account.(900,000+21000+6493+900000+132,482)
31 Dec 2011

Income Summary Dr $1,959,975
Interest Expense Cr $1,959,975

2012
June 30. Recorded the redemption of the bonds, which were called at97. The balance in the bond discount account is $794,888 afterpayment of interest and amortization of discount have beenrecorded. (Record the redemption only.)
The bonds were redeemed for 17,460,000 (18,000,000 x 97%).
At the time of redemption, the carrying value of the bonds is17,205,112 (18,000,000 - 794,888).
17,460,000 cash paid - 17,205,112 carrying value = 254,888 loss onredemption

30 Jun 2012

Bonds Payable Dr 18,000,000
Loss on Bonds Redeemed Dr 254,888
Discount on Bonds Payable Cr 794,888
Cash Cr 17,460,000

Sept. 30.  Paid the second annual payment on the note, whichconsisted of interest of
$25,973 and principal of $30,978.
30 Sep 2012

Interest Expense Dr 19,480
Int accrured on Note Payable Dr 6,493
Notes Payable Dr 30,978
Cash Cr 56,951

2. Indicate the amount of the interest expense in
(a) 2010 ($7000+$900,000+$132,482) = $1039482
(b) 2011 (900,000+21000+6493+900000+132,482) = $ 1959975

3. Determine the carrying amount of the bonds as of December 31,2011.
The bonds were redeemed for 17,460,000 (18,000,000 x 97%).
At the time of redemption, the carrying value of the bonds is17,205,112 (18,000,000 - 794,888).
17,460,000 cash paid - 17,205,112 carrying value = 254,888 loss on redemption