# 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.

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

#### Solutions

Chapter
Section
Chapter 14, Problem 14.4APR
Textbook Problem

## Entries for bonds payable and installment note transactionsThe 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. Instructions1. 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.

Expert Solution

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 $1,000 per bond, to raise fund for financing the operations. Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value. Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note. To Journalize: The entries to record the transactions. ### Explanation of Solution Explanation: Journalize the entries to record the transactions.  Date Accounts and Explanation Post Ref. Debit ($) 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

Expert Solution

2(a)

To determine
The amount of interest expense in Year 1.

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