Question

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

2016
July	1	Issued $71,100,000 of 20-year, 12% callable bonds dated July 1, 2016, at a market (effective) rate of 14%, receiving cash of $61,621,133. Interest is payable semiannually on December 31 and June 30.
Oct.	1	Borrowed $250,000 by issuing a six-year, 5% installment note to Nicks Bank. The note requires annual payments of $49,254, with the first payment occurring on September 30, 2017.
Dec.	31	Accrued $3,125 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 $236,972 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
2017
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $236,972 is combined with the semiannual interest payment.
Sept.	30	Paid the annual payment on the note, which consisted of interest of $12,500 and principal of $36,754.
Dec.	31	Accrued $2,666 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 $236,972 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
2018
June	30	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $8,530,979 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 $10,662 and principal of $38,592.

Required:

1.	Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.
2.	Indicate the amount of the interest expense in (a) 2016 and (b) 2017.
3.	Determine the carrying amount of the bonds as of December 31, 2017.

Answer 1

1.

Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles. Date Particulars Dr. Amount Cr. Amount 2016 1/7/2016 Cash a/c……….dr 61,621,133 Discount a/c …..dr 9,478,867          To Bonds Payable a/c 71,100,000 (Being issue of bonds at discount recorded) 1/10/2016 Cash a/c………..dr 250,000         To Notes Payable a/c 250,000 (Being record of notes borrowed by issuing installment to bank) 31/12/2016 Interest Expenses a/c……….dr 3,125          To Interest Payable a/c 3,125 (Being interest accrued on notes recorded) 31/12/2016 Interest Expenses a/c………dr 3,558,125          To cash a/c 3,296,432          To discount on issue of bonds a/c 261,693 (Being Interest Due) 31/12/2016 Profit and Loss a/c…………dr 3,558,125          To Interest Expense a/c 3,558,125 (Being closing entries passed for interest expense) 2017 30/06/2017 Interest Expense a/c……….dr 3,558,125          To Cash a/c 3,296,432          To discount on issue of bonds a/c 261,693 (Being interest due recorded) 30/09/2017 Notes Payable -5% a/c………dr 36,754 Interests Expense a/c………..dr 3,125 Interest Payable a/c………….dr 12,500         To Cash a/c 52,379 (Being annual payment of notes recorded) 31/12/2017 Interest Expense a/c…………dr 2,666         To interest payable a/c 2,666 (Beinng interest accrued on notes recorded) 30/6/2018 Bonds Payable a/c…………dr 71,100,000 Discount on Redemption of Bonds ac……..dr 6,940,960         To Discount on issue of bonds a/c 5,520,960         To Cash a/c 72,520,000 (Being redemption of bonds at discount recorded)

2.

Indicate the amount of the interest expense in (a) 2016 and (b) 2017. Interest Expense Particulars 2016 2017 Interest on Bonds 3,555,000 7,110,000 Interest on Notes 3125 12,000 Total Interest Expense 3,558,125 7,122,000 3. Determine the carrying amount of the bonds as of December 31, 2017. Carrying Value of Bonds as on 31st December, 2017 Particulars Bonds Payable 71,100,000 Less: Discount on Issue of Bonds -8,672,564 Net Bonds Payable 62,427,436