Question

Entries for bonds payable and installment note transactions

The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year:
2016
July 1. Issued $74,000,000 of 20-year, 11% callable bonds dated July 1, 2016, at a market (effective rate of 13%, receiving cash of $63,532,267. Interest is payable semiannually on December 31 and June 30.
Oct. 1. Borrowed $200,000 by issuing a six-year, 6% installment note to Nicks Bank. The note requires annual payments of $40,673, with the first payment occurring on September 30, 2017.
Dec. 31. Accrued $3,000 of interest on the installment note. The interest is payable on the date of the next installment note payment.
31. Paid the semi-annual interest on the bonds. The bond discount amortization of $261,693 is combined with the semi-annual interest payment.
31. Closed the interest expense account.
2017
June 30. Paid the semi-annual interest on the bonds. The bond discount amortization of $261,693 is combined with the semi-annual interest payment.
Sept. 30. Paid the annual payment on the note, which consisted of interest of $12,000 and principal of $28,673.
Dec. 31. Accrued $2,570 of interest on the installment note. The interest is payable on the dat of the next installment note payment.
31. Paid the semi-annual interest on the bonds. The bond discount amortization of $261,693 is combined with the semi-annual interest payment.
31. Closed the interest expense account.
2018
June 30. Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $9,420,961 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 $10,280 and principal of $30,393.
Instructions:
1. Journalize the entries to record the foregoing transactions.
2. Indicate the amount of the interest expense in (a) 2016 and (b) 2017.

Answer 1

Winklevoss Inc.

Journal Entries:

2016

July 1. Debit Cash $63,532,267

Debit Bonds Discount $10,467,733

Credit 11% Callable Bonds Payable $74,000,000

To record the issuance of 20-year, 11% callable bonds dated

Oct. 1. Debit Cash $200,000

Credit 6% Installment Note Payable (Nicks Bank) $200,000

To record the issuance of a six-year, 6% installment note.

Dec. 31. Debit Interest Expense $3,000

Credit Interest Expense Payable $3,000

To accrue interest for 3 months.

Dec. 31. Debit Interest Expense on Bonds $4,331,693

Credit Bond discount amortization $261,693

Credit Cash $4,070,000

To record the first semiannual interest payment.

Dec. 31. Debit Income Summary $4,334,693

Credit Interest Expense $4,334,693

To close the expense accounts.

2017

June 30. Debit Interest Expense on Bonds $4,331,693

Credit Bond discount amortization $261,693

Credit Cash $4,070,000

To record the second semiannual interest payment.

Sept. 30. Debit 6% Installment Notes Payable $28,673

Debit Interest Expense $9,000

Debit Interest Expense Payable $3,000

Credit Cash $40,673

To record installment payment, including interest.

Dec. 31. Debit Interest Expense $2,570

Credit Interest Expense Payable $2,570

To accrue interest.

Dec. 31. Debit Interest Expense on Bonds $4,331,693

Credit Bond discount amortization $261,693

CreditCash $4,070,000

To record semiannual interest payment.

Dec. 31. Debit Income Summary $4,334,263

Credit Interest Expense $4,334,263

To close the interest expense account.

2018

June 30. Debit 11% Callable Bonds Payable $74,000,000

Credit Bond Discount $1,480,000

Credit Cash $72,520,000

To record the bond redemption only.

Sept. 30. Debit 6% Installment Notes Payable $30,393

Debit Interest Expense $7,710

Debit Interest Expense Payable $2,570

Credit Cash $40,673

To record the second annual payment on the note, which consisted of interest of $10,280 and principal of $30,393.

Step-by-step explanation:

a) Data and Analysis:

2016

July 1. Cash $63,532,267 Bonds Discount $10,467,733 11% Callable Bonds Payable $74,000,000 issue of 20-year, 11% callable bonds dated

July 1, 2016, at a market (effective rate of 13%, receiving cash of . Interest is payable semiannually on December 31 and June 30.

Oct. 1. Cash $200,000 6% Installment Note Payable (Nicks Bank) $200,000

issuance of a six-year, 6% installment note to . The note requires annual payments of $40,673, with the first payment occurring on September 30,

2017.

Dec. 31. Interest Expense $3,000 Interest Expense Payable $3,000

Dec. 31. Interest Expense on Bonds $4,331,693 Bond discount amortization $261,693 Cash $4,070,000

Dec. 31. Income Summary $4,334,693 Interest Expense $4,334,693

2017

June 30. Interest Expense on Bonds $4,331,693 Bond discount amortization $261,693 Cash $4,070,000

Sept. 30. 6% Installment Notes Payable $28,673 Interest Expense $9,000 Interest Expense Payable $3,000 Cash $40,673

Dec. 31. Interest Expense $2,570 Interest Expense Payable $2,570

Dec. 31. Interest Expense on Bonds $4,331,693 Bond discount amortization $261,693 Cash $4,070,000

Dec. 31. Income Summary $4,334,263 Interest Expense $4,334,263

2018

June 30. 11% Callable Bonds Payable $74,000,000 Bond Discount $1,480,000 Cash $72,520,000 To record the bond redemption only.

Sept. 30. 6% Installment Notes Payable $30,393 Interest Expense $7,710 Interest Expense Payable $2,570 Cash $40,673

the second annual payment on the note, which consisted of interest of $10,280 and principal of $30,393.