Question

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

Year 1
July	1	Issued $32,300,000 of 20-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 11%, receiving cash of $27,116,993. Interest is payable semiannually on December 31 and June 30.
Oct.	1	Borrowed $430,000 by issuing a six-year, 4% installment note to Nicks Bank. The note requires annual payments of $82,028, with the first payment occurring on September 30, Year 2.
Dec.	31	Accrued $4,300 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 $129,575 is combined with the semiannual interest payment.
Year 2
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $129,575 is combined with the semiannual interest payment.
Sept.	30	Paid the annual payment on the note, which consisted of interest of $17,200 and principal of $64,828.
Dec.	31	Accrued $3,652 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 $129,575 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 $4,664,707 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 $14,607 and principal of $67,421.

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.

Chart of Accounts

CHART OF ACCOUNTS
Winklevoss Inc.
General Ledger
ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable 122 Allowance for Doubtful Accounts 126 Interest Receivable 127 Notes Receivable 131 Merchandise Inventory 141 Office Supplies 142 Store Supplies 151 Prepaid Insurance 191 Land 192 Store Equipment 193 Accumulated Depreciation-Store Equipment 194 Office Equipment 195 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 221 Salaries Payable 231 Sales Tax Payable 232 Interest Payable 241 Notes Payable 251 Bonds Payable 252 Discount on Bonds Payable 253 Premium on Bonds Payable EQUITY 311 Common Stock 312 Paid-In Capital in Excess of Par-Common Stock 315 Treasury Stock 321 Preferred Stock 322 Paid-In Capital in Excess of Par-Preferred Stock 331 Paid-In Capital from Sale of Treasury Stock 340 Retained Earnings 351 Cash Dividends 352 Stock Dividends 390 Income Summary	REVENUE 410 Sales 610 Interest Revenue 611 Gain on Redemption of Bonds EXPENSES 510 Cost of Merchandise Sold 515 Credit Card Expense 516 Cash Short and Over 521 Sales Salaries Expense 522 Office Salaries Expense 531 Advertising Expense 532 Delivery Expense 533 Repairs Expense 534 Selling Expenses 535 Rent Expense 536 Insurance Expense 537 Office Supplies Expense 538 Store Supplies Expense 541 Bad Debt Expense 561 Depreciation Expense-Store Equipment 562 Depreciation Expense-Office Equipment 590 Miscellaneous Expense 710 Interest Expense 711 Loss on Redemption of Bonds

Answer 1

1)

DAte	Account	Debit	credit
year 1
July1	Cash	27,116,993
	Discount on bond payable	5,183,007
	Bond payable		32,300,000
	[Being bond issued at discount]
oct 1	Cash	430000
	Note payable		430000
	[Being note issued for amount borrowed]
Dec 31	Interest expense	4300
	Interest payable		4300
	[Being interest accrued on note]
dec 31	iNTEREST expense	1583075
	Discount on bond payable		129575
	cash [32300000*.09*6/12]		1453500
	[Being FIrst semiannual interest paid]
year 2
JUne 30	iNTEREST expense	1583075
	Discount on bond payable		129575
	cash		1453500
	[Being semiannual interest paid]
sep 30	Note payable	64828
	Interest expense [17200-4300]	12900
	Interest payable	4300
	cash		82028
	[Being note installment paid]
Dec3 1	Interest expense	3652
	Interest payable		3652
	[interest accrued on note]
dec 31	iNTEREST expense	1583075
	Discount on bond payable		129575
	cash		1453500
year3	Bond payable	32,300,000
	Discount on bond payable		4664707
	Gain on Redemption of Bonds		4018707
	cash [32,300,000*98/100]		31654000
	[being bond redeemed]
dec31	Note payable	67421
	Interest payable	3652
	Interest expense[14607-3652]	10955
	cash		82028

2)Interest expense in year 1 :4300+1583075=1587375

year 2: 1583075+12900+3652+1583075=3182702

3)Total Discount amortised till year 2 : 129575*3= 3 = 388725

the carrying amount of the bonds as of December 31, Year 2. Issue price +bond amortised

      27,116,993 + 388725

    = 27505718