Question

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

Year 1
July 1. Issued $7,730,000 of five-year, 6% callable bonds dated July 1, Year 1, at a market (effective) rate of 8%, receiving cash of $7,103,028. Interest is payable semiannually on December 31 and June 30.
Oct. 1. Borrowed $360,000 by issuing a 10-year, 6% installment note to Nicks Bank. The note requires annual payments of $48,912, with the first payment occurring on September 30, Year 2.
Dec. 31. Accrued $5,400 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 $62,697 is combined with the semiannual interest payment.
Year 2
June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $62,697 is combined with the semiannual interest payment.
Sept. 30. Paid the annual payment on the note, which consisted of interest of $21,600 and principal of $27,312.
Dec. 31. Accrued $4,990 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 $62,697 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 $376,184 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 $19,961 and principal of $28,951.
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
fill in the blank 2 fill in the blank 3

fill in the blank 5 fill in the blank 6

fill in the blank 8 fill in the blank 9

Oct. 1
fill in the blank 11 fill in the blank 12

fill in the blank 14 fill in the blank 15

Dec. 31-Note
fill in the blank 17 fill in the blank 18

fill in the blank 20 fill in the blank 21

Dec. 31-Bond
fill in the blank 23 fill in the blank 24

fill in the blank 26 fill in the blank 27

fill in the blank 29 fill in the blank 30

Year 2
June 30
fill in the blank 32 fill in the blank 33

fill in the blank 35 fill in the blank 36

fill in the blank 38 fill in the blank 39

Sept. 30
fill in the blank 41 fill in the blank 42

fill in the blank 44 fill in the blank 45

fill in the blank 47 fill in the blank 48

fill in the blank 50 fill in the blank 51

Dec. 31-Note
fill in the blank 53 fill in the blank 54

fill in the blank 56 fill in the blank 57

Dec. 31-Bond
fill in the blank 59 fill in the blank 60

fill in the blank 62 fill in the blank 63

fill in the blank 65 fill in the blank 66
Year 3
June 30
fill in the blank 68 fill in the blank 69

fill in the blank 71 fill in the blank 72

fill in the blank 74 fill in the blank 75

fill in the blank 77 fill in the blank 78

Sept. 30
fill in the blank 80 fill in the blank 81

fill in the blank 83 fill in the blank 84

fill in the blank 86 fill in the blank 87

fill in the blank 89 fill in the blank 90
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

The journal entries are given below. Interest Expenses in year 1 is $463,800 and interest Expenses in Year 2 is $618,400. The Carrying Amount of the Bonds as of December 31, Year 2 is $7,353,816

1. Journal Entries:

Year 1:

- July 1: Issued Bonds

- Debit: Cash $7,103,028

- Credit: Bonds Payable $7,730,000

- Credit: Bond Discount $626,972 ([$7,730,000 - $7,103,028] - the effective interest)

- Oct. 1: Issued Installment Note

- Debit: Cash $360,000

- Credit: Notes Payable $360,000

- Dec. 31: Accrued Interest on Installment Note

- Debit: Interest Expense $5,400

- Credit: Interest Payable $5,400

- Dec. 31: Paid Semiannual Interest on Bonds

- Debit: Interest Expense $62,697

- Debit: Bond Discount $62,697

- Credit: Cash $62,697

Year 2:

- June 30: Paid Semiannual Interest on Bonds

- Debit: Interest Expense $62,697

- Debit: Bond Discount $62,697

- Credit: Cash $62,697

- Sept. 30: Paid Annual Payment on Installment Note

- Debit: Interest Expense $21,600

- Debit: Notes Payable $27,312

- Credit: Cash $48,912

- Dec. 31: Accrued Interest on Installment Note

- Debit: Interest Expense $4,990

- Credit: Interest Payable $4,990

- Dec. 31: Paid Semiannual Interest on Bonds

- Debit: Interest Expense $62,697

- Debit: Bond Discount $62,697

- Credit: Cash $62,697

Year 3:

- June 30: Recorded Bond Redemption

- Debit: Bonds Payable $7,730,000

- Debit: Bond Discount $376,184

- Credit: Cash $7,552,184

- Sept. 30: Paid Second Annual Payment on Installment Note

- Debit: Interest Expense $19,961

- Debit: Notes Payable $28,951

- Credit: Cash $48,912

2. Interest Expense:

a. Year 1:

- Interest Expense = $7,730,000 * 6% = $463,800

b. Year 2:

- Interest Expense = $7,730,000 * 8% = $618,400

3. Carrying Amount of the Bonds as of December 31, Year 2:

- Carrying Amount = Face Value - Bond Discount

- Carrying Amount = $7,730,000 - $376,184 = $7,353,816