Question

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

Year 1
July 1.	Issued $8,700,000 of five-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 10%, receiving cash of $8,364,103. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $120,000 by issuing a 10-year, 7% installment note to Intexicon Bank. The note requires annual payments of $17,085, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $2,100 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $33,590 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $33,590 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $8,400 and principal of $8,685.
Dec. 31.	Accrued $1,948 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $33,590 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 $201,539 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 $7,792 and principal of $9,293.

Required:

1. Journalize the entries to record the foregoing transactions. For compound 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.

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.
$

Answer 1

Date	Account Titles and Explanation	Debit	Credit
Year 1
Jul.1	Cash	$8,364,103.00
	Discount on bonds payable	335,897
	Bonds Payable		$8,700,000.00
Oct.1	Cash	120,000
	Notes Payable		120,000
Dec.31	Interest Expense	2,100
	Interest Payable		2,100
Dec.31	Interest Expense	$425,090.00
	Discount on Bonds Payable		$33,590.00
	Cash ($8,700,000 x 9%/x 1/2)		$391,500.00
Dec.31	Income Summary	$427,190.00
	Interest Expense		$427,190.00
Year 2
Jun.30	Interest Expense	$425,090.00
	Discount on Bonds Payable		$33,590.00
	Cash ($8,700,000 x 9%/x 1/2)		$391,500.00
Sept.30	Interest Expense (8400-2100)	$6,300.00
	Interest Payable	$2,100.00
	Notes Payable	$8,685.00
	Cash		$17,085.00
Dec .31	Interest Expense	$1,948.00
	Interest Payable		$1,948.00
Dec.31	Interest Expense	$425,090.00
	Discount on Bonds Payable		$33,590.00
	Cash ($8,700,000 x 9%/x 1/2)		$391,500.00
Dec.31	Income Summary	$858,428.00
	Interest Expense		$858,428.00
Year3
Jun.30	Bonds Payable	$8,700,000.00
	Loss on Redemption of Bonds	$27,539.00
	Discount on Bonds Payable		$201,539.00
	Cash ($8,700,000 x 98%)		$8,526,000.00
	Interest Expense (7792 - 1948)	$5,844.00
	Interest Payable	$1,948.00
	Notes Payable	$9,293.00
	Cash		$17,085.00
2. Indicate the amount of the interest expense in (A) Year 1 and (B) Year 2.
a. Year 1 $	$427190.00
b. Year 2 $	$858,428.00
3. Determine the carrying amount of the bonds as of December 31, Year 2.
	Initial carrying amount of bonds	$8364103.00
	Add:
	Discount amortized on December 31 Year 1	$33590.00
	Discount amortized on June 30, year 2	$33590.00
	Discount amortized on December 31, year 2	$33590.00
	Carrying amount of bonds, December 31 year 2	$8464873.00