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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 $74,000,000 of 20-year, 11% callable bonds dated July 1, Year 1, 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, Year 2.
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 semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
Year 2  
June 30 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual 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 date of the next installment note payment.
31 Paid the .semiannual interest on the bonds. The bond discount amortization of $261,693 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 $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. Round all amounts to the nearest dollar.

2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.

3. Determine the carrying amount of the bonds as of December 31, Year 2.

1.

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note.

To Journalize: The entries to record the transactions.

Explanation

 Explanation:

Journalize the entries to record the transactions.

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

Year 1 Cash 63,532,267
July  1 Discount on Bonds Payable (1) 10,467,733
Bonds Payable 74,000,000
(To record issue of bonds at discount)
October 1 Cash 200,000
Notes Payable 200,000
(To record issue of 6% notes for cash)
December 31 Interest Expense 3,000
Interest Payable 3,000
(To record interest accrued on installment note)
December 31 Interest Expense (4) 4,331,693
       Discount on Bonds Payable (2) 261,693
Cash (3) 4,070,000
(To record semiannual interest payment and amortization on bonds)

Table (1)

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

Year 2 Interest Expense (4) 4,331,693
June 30        Discount on Bonds Payable (2) 261,693
Cash (3) 4,070,000
(To record semiannual interest payment and amortization on bonds)
September 30 Interest Expense 9,000
Interest Payable 3,000
Notes Payable 28,673
Cash 40,673
(To record the annual payment on note)
December 31 Interest Expense 2,570
Interest Payable 2,570
To record interest accrued on installment note)
December 31 Interest Expense (4) 4,331,693
       Discount on Bonds Payable (2) 261,693
Cash (3) 4,070,000
(To record semiannual interest payment and amortization on bonds)

Table (2)

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

Year 3 Bonds Payable 74,000,000
June 30 Loss on Redemption of Bonds (6) 7,940,961
        Discount on Bonds Payable 9,420,961
Cash (5) 72,520,000
(To record redemption of bonds)
September 30 Interest Expense 7,710
Interest Payable 2,570
Notes Payable 30,393
Cash 40,673
(To record the annual payment on note)

Table (3)

Working notes:

Calculate discount on bonds payable.

Discount on bonds payable = (Face value  Cash received)   =$74,000,000$63,532,267=$10,467,733 (1)

Calculate discount on bonds payable semiannually

2(a)

To determine
The amount of interest expense in Year 1.

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