Question

Entries for Bonds Payable and Installment Note Transactions

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

Year 1
July 1.	Issued $6,770,000 of five-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 12%, receiving cash of $6,520,861. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $310,000 by issuing a 10-year, 7% installment note to Intexicon Bank. The note requires annual payments of $44,137, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $5,425 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 $24,914 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $24,914 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $21,700 and principal of $22,437.
Dec. 31.	Accrued $5,032 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 $24,914 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 $149,483 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 $20,129 and principal of $24,008.

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.

Date	Account	Debit	Credit
Year 1
July 1
Oct. 1
Dec. 31-Note
Dec. 31-Bond
Year 2
June 30
Sept. 30
Dec. 31-Note
Dec. 31-Bond
Year 3
June 30
Sept. 30

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

Credit Year 1 Date July 1 Debit $65,20,861 $2,49,139 $67,70,000 Oct 1 $3,10,000 $3,10,000 Dec 31 $5,425 $5,425 Dec 31 $3,97,264 Account Title Cash Discount on Bond Payable Bond Payable (To record issuance of bond) Cash Note Payable (To record notes payable) Interest Expense Interest Payable (To record accrual of interest expense on Note payable) Interest Expense Discount on Bond Payable Cash (To record payment of bond interest) Interest Expense Discount on Bond Payable Cash (To record payment of bond interest) Interest Expense Interest Payable Notes Payable Cash (To record payment of interest and principle) Interest Expense Interest Payable |(To record accrual of interest expense on Note payable) $24,914 $3,72,350 [($6770000 x 11%)/2] June 30 $3,97,264 $24,914 $3,72,350 [($6770000 x 11%)/2] Sept 30 $ 16,275 $5,425 $22,437 $44,137 Dec 31 $5,032 $5,032

2 Dec 31 $3,97,264 $24,914 $3,72,350 [($6770000 x 11%)/2] 3 June 30 $67,70,000 $14,083 Interest Expense Discount on Bond Payable Cash Bond Payable Loss on redemption of Bond Discount on Bond Payable (Notei) Cash (To record redemption of bond) Interest Expense Interest Payable Notes Payable Cash (To record payment of interest and principle) $1,49,483 $66,34,600 [($6770000/100)x98] 3 Sept 30 $15,097 $5,032 $24,008 $44,137 Note i $2,49,139 Discount on Bond Payable Less: Amortisation of Discount on Bond payable Year 1, Dec 31 Year 2, June 30 Year 2, Dec 31 Year 3, June 30 Unamortised amount of Discount on Bond Payable at the time of redemption $24,914 $24,914 $24,914 $24,914 ($99,656) $1,49,483 Ans 2 Interest Expense a. Year 1 $4,02,689 b. Year 2 $8,15,835 $5425+$397264] ($397264+$16275+$5032+$397264] Ans 3 Carrying amount of Bond as of December 31, Year 2 Bond Payable Less: Discount on Bond Payable ($249139-($24914 x 3)] Carrying value of Bond $67,70,000 ($1,74,397) $65,95,603