Question

Entries for Bonds Payable and Installment Note Transactions The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year: Year 1 July 1. Issued $3,340,000 of five-year, 10% callable bonds dated July 1, Year 1, at a market (effective) rate of 11%, receiving cash of $3,214,121. Interest is payable semiannually on December 31 and June 30. Oct. 1. Borrowed $430,000 by issuing a 10-year, 6% installment note to Nicks Bank. The note requires annual payments of $58,423, with the first payment occurring on September 30, Year 2. Dec. 31. Accrued $6,450 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 $12,588 is combined with the semiannual interest payment. Year 2 June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $12,588 is combined with the semiannual interest payment Sept. 30. Paid the annual payment on the note, which consisted of interest of $25,800 and principal of $32,623. Dec. 31. Accrued $5,961 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 $12,588 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 $75,527 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 $23,843 and principal of $34,580. Required: Round all amounts to the nearest dollar. 1. Journalize the entries to record the foregoing transactions. If an amount box does not require an entry, leave it blank.

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

Debit Credit 5 Date Account Title & Explanation 6 Year 1 7 01-Jul Cash 8 Discount on Bonds Payable 9 Bonds Payable 10 (To record issue of bonds on discount) 3,214,121 125,879 3,340,000 11 430,000 12 13 01-Oct Cash Notes Payable (To record issue of notes payable) 430,000 14 15 16 6,450 17 31-Dec Interest Expense Interest Payable (To record accrued interest Expense) 6,450 18 19 20 179,588 21 22 31-Dec Interest Expense Cash Discount on Bonds Payable (To record interest expense on bonds) 167,000 (3340000*10%*6/12) 12,588 23

25 186,038 31-Dec Income Summary (179588+6450) Interest Expense (To transfer interest expense to Income Summary) 26 27 186,038 28 179,588 167,000 (3340000*10%*6/12) 12,588 29 Year 2 30 30-Jun Interest Expense 31 Cash 32 Discount on Bonds Payable 33 (To record interest expense on bonds) 34 35 30-Sep Notes Payable 36 Interest Expense 37 Interest Payable 38 Cash 39 (To record the annual Payment) 40 41 31-Dec Interest Expense 42 Interest Payable 43 (To record accrued interest Expense) 44 32,623 19,350 6,450 58,423 5,961 5,961

45 179,588 46 31-Dec Interest Expense Cash Discount on Bonds Payable (To record interest expense on bonds) 167,000 (3340000*10%*6/12) 12,588 47 48 49 50 185,549 51 31-Dec Income Summary (179588+5961) Interest Expense (To transfer interest expense to Income Summary) 185,549 52 53 3,340,000 8,727 3,273,200 (33400000*.98) 75,527 54 Year 3 55 30-Jun Bonds Payable 56 Loss on Redemption of Bonds 57 Cash 58 Discount on Bonds Payable 59 (To record redemption of bonds) 60 61 30-Sep Notes Payable 62 Interest Expense 63 Interest Payable 64 Cash 65 (To record the annual Payment) 34,580 17,882 5,961 58,423

67 2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2 68 Year 1 70 Year 2 69 186,038 185,549 71 72 3. Determine the carrying amount of the bonds as of December 31, Year 2 73 74 75 76 Initial carrying amount of bonds Add Discount amortized on December 31, Year 1 Discount amortized on June 30, Year 2 Discount amortized on December 31, Year 2 Carrying amount of bonds, December 31, Year 2 3,214,121 12,588 12,588 12,588 3,251,885 77 78 79