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 $1,330,000 of five-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 12%, receiving cash of $1,281,055. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $380,000 by issuing a 10-year, 8% installment note to Intexicon Bank. The note requires annual payments of $57,631, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $7,600 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 $4,895 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $4,895 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $30,400 and principal of $27,231.
Dec. 31.	Accrued $7,055 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 $4,895 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 $29,367 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 $28,222 and principal of $29,409.

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

Date	Account Titles and Explanation	Debit	Credit
Year 1
Jul.1	Cash	$1,281,055.00
	Discount on bonds payable	48,945
	Bonds Payable		$1,330,000.00
Oct.1	Cash	380,000
	Notes Payable		380,000
Dec.31	Interest Expense	7,600
	Interest Payable		7,600
Dec.31	Interest Expense	$78,045.00
	Discount on Bonds Payable		$4,895.00
	Cash ($1,330,000 x 11%/x 1/2)		$73,150.00
Dec.31	Income Summary	$85,645.00
	Interest Expense		$85,645.00
Year 2
Jun.30	Interest Expense	$78,045.00
	Discount on Bonds Payable		$4,895.00
	Cash ($1,330,000 x 11%/x 1/2)		$73,150.00
Sept.30	Interest Expense (30,400 - 7600)	$22,800.00
	Interest Payable	$7,600.00
	Notes Payable	$27,231.00
	Cash		$57,631.00
Dec .31	Interest Expense	$7,055.00
	Interest Payable		$7,055.00
Dec.31	Interest Expense	$78,045.00
	Discount on Bonds Payable		$4,895.00
	Cash ($1,330,000 x 11%/x 1/2)		$73,150.00
Dec.31	Income Summary	$185,945.00
	Interest Expense		$185,945.00
Year3
Jun.30	Bonds Payable	$1,330,000.00
	Loss on Redemption of Bonds	$2,767.00
	Discount on Bonds Payable		$29,367.00
	Cash ($1,330,000,000 x 98%)		$1,303,400.00
	Interest Expense	$21,167.00
	Interest Payable	$7,055.00
	Notes Payable	$29,409.00
	Cash		$57,631.00
2. Indicate the amount of the interest expense in (A) Year 1 and (B) Year 2.
a. Year 1 $	$85645.00
b. Year 2 $	$185,945.00
3. Determine the carrying amount of the bonds as of December 31, Year 2.
	Initial carrying amount of bonds	$1281055.00
	Add:
	Discount amortized on December 31 Year 1	$4895.00
	Discount amortized on June 30, year 2	$4895.00
	Discount amortized on December 31, year 2	$4895.00
	Carrying amount of bonds, December 31 year 2	$1295740.00