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

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 4PA
Textbook Problem
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The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year:

Chapter 14, Problem 4PA, The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar , example  1

Chapter 14, Problem 4PA, The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar , example  2

Instructions

  1. 1. Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar.
  2. 2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
  3. 3. Determine the carrying amount of the bonds as of December 31, Year 2.

1.

To determine

Journalize the entries to record the transactions.

Explanation of Solution

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.

Journalize the entries to record the transactions.

DateAccounts and ExplanationPost Ref.

Debit

($)

Credit

($)

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

DateAccounts and ExplanationPost Ref.

Debit

($)

Credit

($)

Year 2Interest 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 30Interest Expense  9,000 
 Interest Payable 3,000 
 Notes Payable  28,673 
 Cash  40,673
 (To record the annual payment on note)   
     
December 31Interest Expense 2,570 
 Interest Payable  2,570
 To record interest accrued on installment note)   
     
December 31Interest 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)

DateAccounts and ExplanationPost Ref.

Debit

($)

Credit

($)

Year 3Bonds Payable 74,000,000 
June 30Loss 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 30Interest 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:

(1)

Calculate discount on bonds payable.

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

(2)

Calculate discount on bonds payable semiannually

2(a)

To determine

Calculate the amount of interest expense in Year 1.

b.

To determine

Calculate the amount of interest expense in Year 2.

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