Entries for Bonds Payable, including bond redemption The following transactions
ID: 2535993 • Letter: E
Question
Entries for Bonds Payable, including bond redemption
The following transactions were completed by Montague Inc., whose fiscal year is the calendar year:
Year 1
July 1. Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semiannually on December 31 and June 30.
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined
with the semiannual interest payment.
31. Closed the interest expense account.
Year 2
June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined
with the semiannual interest payment..
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined with the semiannual interest payment.
31. Closed the interest expense account.
Year 3
June 30. Recorded the redemption of the bonds, which were called at 103. The balance in the bond premium
account is $6,253,632 after payment of interest and amortization of premium have been recorded.
(Record the redemption only.)
1. Journalize the entries to record the foregoing transactions. For a compound transaction, if an amount box does not require an entry, leave it blank. When required, round amounts to the nearest dollar.
Year 1 July1
Dec.31
Dec.31
Year 2 June 30
Dec.31
Dec.31
Year 3 June 30
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.
$
Explanation / Answer
1) Date Account Titles and Explanation Debit Credit Year 1 Jul.1 Cash $62,817,040.00 Premium on bonds payable $7,817,040.00 Bonds Payable $55,000,000.00 Dec.31 Interest Expense $2,084,148.00 Premium on Bonds Payable $390,852.00 Cash ($55,000,000 x 9%/x 1/2) $2,475,000.00 Dec.31 Income Summary $2,084,148.00 Interest Expense $2,084,148.00 Year 2 Jun.30 Interest Expense $2,084,148.00 Premium on Bonds Payable $390,852.00 Cash ($55,000,000 x 9%/x 1/2) $2,475,000.00 Dec.31 Interest Expense $2,084,148.00 Premium on Bonds Payable $390,852.00 Cash ($55,000,000 x 9%/x 1/2) $2,475,000.00 Dec.31 Income Summary $4,168,296.00 Interest Expense $4,168,296.00 Year3 Jun.30 Bonds Payable $55,000,000.00 Premium on Bonds Payable $6,253,632.00 Gain on Redemption of Bonds $4,603,632.00 Cash ($55,000,000 x 103%) $56,650,000.00 2. Indicate the amount of the interest expense in (A) Year 1 and (B) Year 2. a. Year 1 $ $2,084,148.00 b. Year 2 $ $4,168,296.00 3. Determine the carrying amount of the bonds as of December 31, Year 2. $ Initial carrying amount of bonds $62,817,040.00 Less: Premium amortized on December 31 Year 1 $390,852.00 Premium amortized on June 30, year 2 $390,852.00 Premium amortized on December 31, year 2 $390,852.00 Carrying amount of bonds, December 31 year 2 $61,644,484.00
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