The following transactions were completed by Hobson Inc., whose fiscal year is t

Question

The following transactions were completed by Hobson Inc., whose fiscal year is the calendar year:
2010
July 1. Issued $18,000,000 of five-year, 10% callable bonds dated July 1, 2010, at an effective rate of 12%, receiving cash of $16,675,184. Interest is payable semiannually on December 31 and June 30.
Oct. 1. Borrowed $400,000 as a 10-year, 7% installment note from Marble Bank.
The note requires annual payments of $56,951, with the first payment occurring on September 30, 2011.
Dec. 31. Accrued $7,000 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.
31. Recorded bond discount amortization of $132,482, which was determined using the straight-line method.
31. Closed the interest expense account.
2011
June 30. Paid the semiannual interest on the bonds.
Sept. 30. Paid the annual payment on the note, which consisted of interest of $28,000 and principal of $28,951.
Dec. 31. Accrued $6,493 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.
31. Recorded bond discount amortization of $264,964, which was determined using the straight-line method.
31. Closed the interest expense account.
2012
June 30. Recorded the redemption of the bonds, which were called at 97. The balance in the bond discount account is $794,888 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
$25,973 and principal of $30,978.
Instructions
1. Journalize the entries to record the foregoing transactions.
2. Indicate the amount of the interest expense in
(a) 2010 and
(b) 2011.
3. Determine the carrying amount of the bonds as of December 31, 2011.

Explanation / Answer

July 1. Issued $18,000,000 of five-year, 10% callable bonds dated July 1, 2010, at an effective rate of 12%, receiving cash of $16,675,184. Interest is payable semiannually on December 31 and June 30. 01 Jul 2010 Cash Dr $16,675,184 Discount on Bonds Payable Dr $1,324,816 Bonds Payable Cr $18000,000 Oct. 1. Borrowed $400,000 as a 10-year, 7% installment note from Marble Bank. The note requires annual payments of $56,951, with the first payment occurring on September 30, 2011. 01 Oct 2010 Cash Dr 400,000 Note Payable Cr 400,000 Dec. 31. Accrued $7,000 of interest on the installment note. The interest is payable on the date of the next installment note payment. 31 Dec 2010 Int Expense Dr 7000 Int accrured on Note Payable Cr 7000 31. Paid the semiannual interest on the bonds. ($18,000,000*10%/2= $900,000) 31 Dec 2010 Int Expense Dr 900,000 Cash Cr 900,000 31. Recorded bond discount amortization of $132,482, which was determined using the straight-line method. 31 Dec 2010 Interest Expense Dr $132,482 Discount on Bonds Payable Cr $132,482 31. Closed the interest expense account.($7000+$900,000+$132,482) 31 Dec 2010 Income Summary Dr $1039,482 Interest Expense Cr $1039,482 2011 June 30. Paid the semiannual interest on the bonds. 30 Jun 2011 Interest Expense Dr 900,000 Cash Cr 900,000 Sept. 30. Paid the annual payment on the note, which consisted of interest of $28,000 and principal of $28,951. 30 Sep 2011 Interest Expense Dr 21,000 Int accrured on Note Payable Dr 7,000 Notes Payable Dr 28,951 Cash Cr 56,951 Dec. 31. Accrued $6,493 of interest on the installment note. The interest is payable on the date of the next installment note payment. 31 Dec 2011 Int Expense Dr 6,493 Int accrured on Note Payable Cr 6,493 31. Paid the semiannual interest on the bonds. 31 Dec 2011 Interest Expense Dr 900,000 Cash Cr 900,000 31. Recorded bond discount amortization of $264,964, which was determined using the straight-line method.(Annual Disc amortization is 132,482. SO total Disc amortized at end of Y2 = 132,482*2 = 264,964) 31 Dec 2011 Interest Expense Dr $132,482 Discount on Bonds Payable Cr $132,482 31. Closed the interest expense account. (900,000+21000+6493+900000+132,482) 31 Dec 2011 Income Summary Dr $1,959,975 Interest Expense Cr $1,959,975 2012 June 30. Recorded the redemption of the bonds, which were called at 97. The balance in the bond discount account is $794,888 after payment of interest and amortization of discount have been recorded. (Record the redemption only.) The bonds were redeemed for 17,460,000 (18,000,000 x 97%). At the time of redemption, the carrying value of the bonds is 17,205,112 (18,000,000 - 794,888). 17,460,000 cash paid - 17,205,112 carrying value = 254,888 loss on redemption 30 Jun 2012 Bonds Payable Dr 18,000,000 Loss on Bonds Redeemed Dr 254,888 Discount on Bonds Payable Cr 794,888 Cash Cr 17,460,000 Sept. 30. Paid the second annual payment on the note, which consisted of interest of $25,973 and principal of $30,978. 30 Sep 2012 Interest Expense Dr 19,480 Int accrured on Note Payable Dr 6,493 Notes Payable Dr 30,978 Cash Cr 56,951 2. Indicate the amount of the interest expense in (a) 2010 ($7000+$900,000+$132,482) (b) 2011 (900,000+21000+6493+900000+132,482) 3. Determine the carrying amount of the bonds as of December 31, 2011. The bonds were redeemed for 17,460,000 (18,000,000 x 97%). At the time of redemption, the carrying value of the bonds is 17,205,112 (18,000,000 - 794,888). 17,460,000 cash paid - 17,205,112 carrying value = 254,888 loss on redemption

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