The following transactions were completed by Winklevoss Inc., whose fiscal year

Question

The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year: Year 1 July 1. Issued $2,300,000 of five-year, 7% callable bonds dated July 1, Year 1, at a market (effective) rate of 9%, receiving cash of $2,118,007. Interest is payable semiannually on December 31 and June 30. Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $18,200 is combined with the semiannual interest payment. Dec. 31. Closed the interest expense account. Year 2 June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $18,200 is combined with the semiannual interest payment. Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $18,200 is combined with the semiannual interest payment. Dec. 31. Closed the interest expense account. Year 3 June 30. Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $109,195 after payment of interest and amortization of discount have been recorded. (Record the redemption only.) Required: 1. Journalize the entries to record the foregoing transactions. If an amount box does not require an entry, leave it blank or enter "0". When required, round your answers to the nearest dollar. Date Account Debit Credit Year 1 July 1 Cash 0 Discount on bonds payable 0 0 Bonds payable 0 0 Dec. 31-Bond Interest expense 0 0 Discount on bonds payable 0 0 Cash 0 0 Dec. 31-Closing Income summary 0 Interest expense 0 Year 2 June 30 Interest expense 0 0 Discount on bonds payable 0 0 Cash 0 0 Dec. 31-Bond Interest expense 0 0 Discount on bonds payable 0 0 Cash 0 0 Dec. 31-Closing Income summary 0 Interest expense 0 Year 3 June 30 Bonds payable 0 0 Loss on redemption of bonds 0 0 Discount on bonds payable 0 0 Cash 0 0 2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2. a. Year 1 $ b. Year 2 $ 3. Determine the carrying amount of the bonds as of December 31, Year 2. $ Check My Work

Explanation / Answer

1. Journal Entries to record the foregoing transactions Date Account Debit Credit 1-Jul Cash $2,118,007 Discount on bonds payable $181,993 Bonds payable $2,300,000 31-Dec Bond Interest expense $80,500 Discount on Bonds Payable $18,200 Cash $62,300 31-Dec Closing Income summary $80,500 Interest expense $80,500 30-Jun Bond Interest expense $80,500 Discount on Bonds Payable $18,200 Cash $62,300 31-Dec Bond Interest expense $80,500 Discount on Bonds Payable $18,200 Cash $62,300 31-Dec Closing Income summary $161,000 Interest expense $161,000 30-Jun Bond Interest expense $80,500 Discount on Bonds Payable $18,200 Cash $62,300 30-Jun Bonds payable $2,300,000 Loss on redemption of bonds $63,195 Discount on Bonds payable $109,195 Cash $2,254,000 Interest expenses = $2300000 x 7% = $161000 annually and $80500 semiannually 2. Interest expense in Year 1 and Year 2 Year 1 Interest expense = $2300000 x 7% x1/2 = $80500 Year 2 Interest expense = $2300000 x 7% = $161000 3. Carrying amount of Bonds as of December 31, year 2 Bonds payable $2,300,000 Less: Discount on Bonds payable ($181,993) Add: amortization of discount $18,200 Carrying Value for Year 1 $2,136,207 Add: amortization of discount $36,400 Carrying Value for Year 2 $2,172,607

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