Question

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

Year 1
July	1	Issued $58,800,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $50,482,396. Interest is payable semiannually on December 31 and June 30.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 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 $207,940 is combined with the semiannual interest payment.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 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 98. The balance in the bond discount account is $7,485,844 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)

Required:

1.	Journalize the entries to record the 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

1.

Year 1	Account Titles	Debit	Credit
July 1	Cash	50,482,396
	Discount on bonds payable	8,317,604
	Bonds Payable		58,800,000
Dec 31	Interest Expense	3441940
	Discount on bonds payable		207940
	Cash [58,800,000*11%*1/2]		3234000
Dec 31	Income summary	3441940
	Interest Expense		3441940
Year 2
June 30	Interest Expense	3441940
	Discount on bonds payable		207940
	Cash [58,800,000*11%*1/2]		3234000
Dec 31	Interest Expense	3441940
	Discount on bonds payable		207940
	Cash [58,800,000*11%*1/2]		3234000
Dec 31	Income summary	6883880
	Interest Expense		6883880
Year 3
June 30	Bonds Payable	58800000
	Loss on redemption of bonds	6,309,844
	Discount on bond payable		7,485,844
	Cash		57624000

2.

	Year 1	Year 2
June 30		3441940
Dec 31	3441940	3441940
Total	3441940	6883880

3.

Issue price of bonds	58,800,000
Less: Discount unamortized [8317604 - (207940*3)	7693784
Carrying value	51,106,216