PLEASE ANSWER ALL BLANKS/SHADED CELLS IN ORDER TO BE CORRECT. THANK YOU. PR 14-4
ID: 2456622 • Letter: P
Question
PLEASE ANSWER ALL BLANKS/SHADED CELLS IN ORDER TO BE CORRECT. THANK YOU.
PR 14-4B Entries for bonds payable and installment note transactions The following transactions were completed by Montague Inc., whose fiscal year is the calendar year: 2016 July 1. Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, 2016, at a market OBJ. 3,4 (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable seman- nually on December 31 and June 30. 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, 2017. Oct. 1. Dec. 31. Accrued $9,000 of interest on the installment note. The interest is payable on the date of the next installment note payment. mortization of 31. Paid the semiannual interest on the bonds. The bond discount a $390,852 is combined with the semiannual interest payment (Continued) 31. Closed the interest expense account.Explanation / Answer
The answer is as follows:
2016
July 1. Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, 2016, at a market
(effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semian-
nually on December 31 and June 30.
01 Jul 2016
Cash Dr $62,817,040
Bonds Payable Cr $55,000,000
Premium on Bonds Payable Cr $7,817,040
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 oc-
curring on September 30, 2017.
01 Oct
Cash Dr $450,000
Note Payable Cr $450,000
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 Dec 2016
Interest Expense Dr $9,000
Interest accrured on Note Payable Cr $9,000
31. Paid the semiannual interest on the bonds. The bond premium is amortized an-
nually in a separate journal entry.
($55,000,000*9%/2= $2,475,000)
31 Dec 2016
Interest Expense Dr $2,475,000
Cash Cr 2,475,000
31. Recorded bond premium amortization of $781,704, which was determined
using the straight-line method.
31 Dec 2016
Premium on Bonds Payable Dr $781,704
Interest Expense Cr $781,704
31. Closed the interest expense account.($9000+$2,475,000-$781,704)
31 Dec 2016
Income Summary Dr $1,702,296
Interest Expense Cr $1,702,296
2017
June 30. Paid the semiannual interest on the bonds.
30 Jun 2017
Interest Expense Dr $2,475,000
Cash Cr 2,475,000
Sept. 30. Paid the annual payment on the note, which consisted of interest of $36,000
and principal of $61,342.
Interest Expense Dr $27,000
Interest accrured on Note Payable Dr $9,000
Notes Payable Dr $61,342
Cash Cr $97,342
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 Dec 2017
Interest Expense Dr $7,773
Interest accrured on Note Payable Cr $7,773
31. Paid the semiannual interest on the bonds.
31 Dec 2017
Interest Expense Dr $2,475,000
Cash Cr 2,475,000
31. Recorded bond premium amortization of $781,704, which was determined
using the straight-line method.
(Annual Disc amortization is $781,704. SO total Disc amortized at end of Y2 = 781,704*2 = 1,563,408)
31 Dec 2017
Premium on Bonds Payable Dr $781,704
Interest Expense Cr $781,704
31. Closed the interest expense account. (2,475,000+27,000+7,773+2,475,000-781,704)
31 Dec 2015
Income Summary Dr $4,203,069
Interest Expense Cr $4,203,069
2018
June 30. Recorded the redemption of the bonds, which were called at 103. The bal-
ance in the bond premium account is $6,253,632 after payment of interest
and amortization of premium have been recorded. (Record the redemption
only.)
The bonds were redeemed for 56,650,000 (55,000,000 x 103%).
At the time of redemption, the carrying value of the bonds is 61,253,632 (55,000,000 + 6,253,632).
56,650,000 cash paid - 61,253,632 carrying value = 4,603,632 gain on redemption
30 Jun 2018
Bonds Payable Dr $55,000,000
Premium on bond Dr $6,253,632
Cash Cr $56,650,000
Gain on redemption of Bond $4,603,632
Sept. 30. Paid the second annual payment on the note, which consisted of interest of
$31,093 and principal of $66,249.
30 Sep 2018
Interest Expense Dr $23,320
Interest accrured on Note Payable Dr $7,773
Notes Payable Dr $66,249
Cash Cr $97,342
2. Indicate the amount of the interest expense in
(a) 2016 ($9000+$2,475,000-$781,704)
(b) 2017 (2,475,000+27,000+7,773+2,475,000-781,704)
3. Determine the carrying amount of the bonds as of December 31, 2017.
The bonds were redeemed for 56,650,000 (55,000,000 x 103%).
At the time of redemption, the carrying value of the bonds is $61,253,632 (55,000,000 + 6,253,632).
56,650,000 cash paid - 61,253,632 carrying value = 4,603,632 gain on redemption
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