Question

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

 Year 1

 July 1 Issued $74,000,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $63,532,267. Interest is payable semiannually on December 31 and June 30.

 Oct. 1 Borrowed $200,000 by issuing a six-year, 6% installment note to Nicks Bank. The note requires annual payments of $40,673, with the first payment ocourring on September 30, Year 2.

 Dec.  31 Accrued $3,000 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. The bond discount amortization of $261,693 is combined with the semiannual interest payment.

 

 Year 2

 June  30 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.

 Sept.  30 Paid the annual payment on the note, which consisted of interest of $12,000 and principal of $28,673. 31

 Dec. 31 Accrued $2,570 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 $261,693 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 $9,420,961 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 $10,280 and principal of $30,393.

 

 

 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.

Answer 1

Date	Account Title	Debit	Credit
Year 1
Jul.1	Cash	63532267
	Discount on Bonds Payable(74000000-63532267)	10467733
	Bonds payable		74000000
Oct.1	Cash	200000
	Installment Note		200000
31-Dec	Interest expense	3000
	Interest payable		3000
	(on install. Note)
31-Dec	Interest expense	4331693
	Discount on Bonds Payable(10467733/40)		261693
	Cash(74000000*11%/2)		4070000
Year 2
30-Jun	Interest expense	4331693
	Discount on Bonds Payable(10467733/40)		261693
	Cash(74000000*11%/2)		4070000
30-Sep	Interest payable	3000
	Interest expense	9000
	Installment Note	28673
	Cash		40673
31-Dec	Interest expense	2570
	Interest payable		2570
	(on install. Note)
	Interest expense	4331693
	Discount on Bonds Payable(10467733/40)		261693
	Cash(74000000*11%/2)		4070000
Year 3
30-Jun	Bonds payable	74000000
	Loss on early redemption	7940961
	Cash 74000000*98%		72520000
	Discount on Bonds Payable		9420961
30-Sep	Interest payable	2570
	Interest expense(10280-2570)	7710
	Installment Note	30393
	Cash		40673

Installment note amortisation
Oct.1,Yr.1				200000
Sep.30 Yr.2	40673	12000	28673	171327
Sep.30 Yr.3	40673	10280	30393	140934
Sep.30 Yr.4	40673	8456	32217	108717
Sep.30 Yr.5	40673	6523	34150	74567
Sep.30 Yr.6	40673	4474	36199	38368
Sep.30 Yr.7	40673	2302	38371	-3
	244038	44035

Bond amortisation
No.of periods	Stated semi-annual int.FV*5.5%	Stated Int+Disc amort.	Disc. Amort.	Debit bal. in bond discount	Cr. Bal. in Bonds payable	Carrying value
0				10467733	74000000	63532267
1	4070000	4331693	261693	10206040	74000000	63793960
2	4070000	4331693	261693	9944347	74000000	64055653
3	4070000	4331693	261693	9682654	74000000	64317346
4	4070000	4331693	261693	9420961	74000000	64579039

JE that had been passed on Jun 30
Interest expense	4331693
Discount on Bonds Payable(10467733/40)		261693
Cash(74000000*11%/2)		4070000
Now, on redemption
Bonds payable	74000000
Loss on early redemption	7940961
Discount on Bonds Payable		9420961
Cash 74000000*98%		72520000

Requirement #2) As discount is amortised at the same amt.of 261693 every half-year & stated interest is also fixed for that period, interest expensed for each half-year is also fixed at   4331693 (Stated int+disc.amort.)
Requirement #3) Carrying value of the bond= 74000000-9420961=64579039