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

### Financial Accounting

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

Chapter
Section

### Financial Accounting

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

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 $1,000 per bond, to raise fund for financing the operations. Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value. Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note. Journalize the entries to record the transactions.  Date Accounts and Explanation Post Ref. Debit ($) 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 note (1): Calculate discount on bonds payable. Premium on bonds payable = (Cash receivedFace value ) =$62,817,040$55,000,000=$7,817,040

Working note (2):

Calculate premium 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.

3.

To determine

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

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