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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 Montague Inc., whose fiscal year is the calendar year.

Year 1  
July 1 Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semiannually on December 31 and June 30.
Oct. 1 Borrowed $450,000 by issuing a six-year, 8% installment note to Intexicon Bank. The note requires annual payments of $97,342, with the first payment occurring on September 30, Year 2.
Dec. 31 Accrued $9,000 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 premium amortization of $390,852 is combined with the semiannual interest payment.
Year 2  
June 30 Paid the semiannual interest on the bonds. The bond premium amortization of $390,852 Is combined with the semiannual interest payment.
Sept. 30 Paid the annual payment on the note, which consisted of interest of $36,000 and principal of $61,342.
Dec. 31 Accrued $7,773 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 premium amortization of $390,852 is combined with the semiannual interest payment.
Year 3  
June 30 Recorded the redemption of the bonds, which were called at 103. The balance in the bond premium account is $6,253,632 after payment of interest and amortization of premium have been recorded. Record the redemption only.
Sept. 30 Paid the second annual payment on the note, which consisted of interest of $31,093 and principal of $66,249.

Instructions

1. Journalize the entries to record the foregoing transactions.

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 62,817,040
July  1        Premium on Bonds Payable (1) 7,817,40
Bonds Payable 55,000,000
(To record issue of bonds at premium)
October 1 Cash 450,000
Notes Payable 450,000
(To record issue of 6% notes for cash)
December 31 Interest Expense 9,000
Interest Payable 9,000
(To record interest accrued on installment note)
December 31 Interest Expense (4) 2,084,148
Premium on Bonds Payable (2) 390,852
Cash (3) 2,475,000
(To record semiannual interest payment and amortization on bonds)

Table (1)

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

Year 2 Interest Expense (4) 2,084,148
June 30 Premium on Bonds Payable (2) 390,852
Cash (3) 2,475,000
(To record semiannual interest payment and amortization on bonds)
September 30 Interest Expense 27,000
Interest Payable 9,000
Notes Payable 61,342
Cash 97,342
(To record the annual payment on note)
December 31 Interest Expense 7,773
Interest Payable 7,773
To record interest accrued on installment note)
December 31 Interest Expense (4) 2,084,148
Premium on Bonds Payable (2) 390,852
Cash (3) 2,475,000
(To record semiannual interest payment and amortization on bonds)

Table (2)

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

Year 3 Bonds Payable 55,000,000
June 30 Premium on Bonds Payable 6,253,632
     Gain on Redemption of Bonds (6) 4,603,632
    Cash (5) 56,650,000
(To record redemption of bonds)
September 30 Interest Expense 23,320
Interest Payable 7,773
Notes Payable 66,249
Cash 97,342
(To record the annual payment on note)

Table (3)

Working notes:

Calculate discount on bonds payable.

Premium on bonds payable = (Cash receivedFace value  )   =$62,817,040$55,000,000=$7,817,040 (1)

Calculate premium on bonds payable semiannually

2.

a.

To determine
The amount of interest expense in Year 1.

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