Question

The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year: Year 1 July 1. Issued $2,300,000 of five-year, 7% callable bonds dated July 1, Year 1, at a market (effective) rate of 9%, receiving cash of $2,118,007. Interest is payable semiannually on December 31 and June 30. Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $18,200 is combined with the semiannual interest payment. Dec. 31. Closed the interest expense account. Year 2 June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $18,200 is combined with the semiannual interest payment. Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $18,200 is combined with the semiannual interest payment. Dec. 31. Closed the interest expense account. Year 3 June 30. Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $109,195 after payment of interest and amortization of discount have been recorded. (Record the redemption only.) Required: 1. Journalize the entries to record the foregoing 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 0 Discount on bonds payable 0 0 Bonds payable 0 0 Dec. 31-Bond Interest expense 0 0 Discount on bonds payable 0 0 Cash 0 0 Dec. 31-Closing Income summary 0 Interest expense 0 Year 2 June 30 Interest expense 0 0 Discount on bonds payable 0 0 Cash 0 0 Dec. 31-Bond Interest expense 0 0 Discount on bonds payable 0 0 Cash 0 0 Dec. 31-Closing Income summary 0 Interest expense 0 Year 3 June 30 Bonds payable 0 0 Loss on redemption of bonds 0 0 Discount on bonds payable 0 0 Cash 0 0 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. $ Check My Work

Answer 1

1. Journal Entries to record the foregoing transactions
Date	Account	Debit	Credit
1-Jul	Cash	$2,118,007
	Discount on bonds payable	$181,993
	Bonds payable		$2,300,000
31-Dec	Bond Interest expense	$80,500
	Discount on Bonds Payable		$18,200
	Cash		$62,300
31-Dec	Closing Income summary	$80,500
	Interest expense		$80,500
30-Jun	Bond Interest expense	$80,500
	Discount on Bonds Payable		$18,200
	Cash		$62,300
31-Dec	Bond Interest expense	$80,500
	Discount on Bonds Payable		$18,200
	Cash		$62,300
31-Dec	Closing Income summary	$161,000
	Interest expense		$161,000
30-Jun	Bond Interest expense	$80,500
	Discount on Bonds Payable		$18,200
	Cash		$62,300
30-Jun	Bonds payable	$2,300,000
	Loss on redemption of bonds	$63,195
	Discount on Bonds payable		$109,195
	Cash		$2,254,000
	Interest expenses = $2300000 x 7% = $161000 annually and $80500 semiannually
2. Interest expense in Year 1 and Year 2
Year 1
	Interest expense = $2300000 x 7% x1/2 = $80500
Year 2
	Interest expense = $2300000 x 7% = $161000
3. Carrying amount of Bonds as of December 31, year 2
	Bonds payable	$2,300,000
	Less: Discount on Bonds payable	($181,993)
	Add: amortization of discount	$18,200
	Carrying Value for Year 1	$2,136,207
	Add: amortization of discount	$36,400
	Carrying Value for Year 2	$2,172,607