Entries for Bonds Payable, including bond redemption The following transactions
ID: 2580554 • 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:
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.
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.
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 combinedwith 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.)
Explanation / Answer
Solution:
1) Journal Entries
Date
General Journal
Debit
Credit
Year 1 July 1
Cash (Proceeds from bonds issue)
$62,817,040
Bonds Payable (Par Value)
$55,000,000
Premium on Bonds Payable (62817040 - 55000000)
$7,817,040
Year 1Dec.31
Interest Expense (2475000 - 390852)
$2,084,148
Premium on Bonds Payable (Amortization)
$390,852
Cash Interest Payable (Par Value 55,000,000*9%*1/2)
$2,475,000
Year 1Dec.31
Interest Payable
$2,475,000
Cash
$2,475,000
Year 1Dec.31
Income Summary
$2,084,148
Interest Expense
$2,084,148
(Closed Interest Expense account to Income Summary)
Year 2 June 30
Interest Expense (2475000 - 390852)
$2,084,148
Premium on Bonds Payable (Amortization)
$390,852
Interest Payable (Par Value 55,000,000*9%*1/2)
$2,475,000
Year 2 June 30
Interest Payable
$2,475,000
Cash
$2,475,000
Year 2 Dec 31
Interest Expense (2475000 - 390852)
$2,084,148
Premium on Bonds Payable (Amortization)
$390,852
Interest Payable (Par Value 55,000,000*9%*1/2)
$2,475,000
Year 2 Dec 31
Interest Payable
$2,475,000
Cash
$2,475,000
Year 2 June 30
Income Summary
$4,168,296
Interest Expense
$4,168,296
(Closed Interest Expense account to Income Summary)
Year 3 June 30
Bonds Payable (Par Value)
$55,000,000
Premium on Bonds Payable
$6,253,632
Cash (Par Value 55,000,000*103%)
$56,650,000
Loss on Redemption of Bonds (Balancing figure)
$4,603,632
Part 2 --- the amount of the interest expense in (A) Year 1 and (B) Year 2
a. Year 1 = $2,084,148
b. Year 2 = $4,168,296
Part 3 -- carrying amount of the bonds as of December 31, Year 2
Carrying Amount of the bonds as of Dec 31, Year 2 = Par Value of Bonds + Unamortized Bonds Premium
= $55,000,000 + ($7,817,040 – Amortization of Premium 3 times $390,582*3)
= 55,000,000 + (7,817,040 - 1,172,556)
= 55,000,000 + 6,644,484
= $61,644,484
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Date
General Journal
Debit
Credit
Year 1 July 1
Cash (Proceeds from bonds issue)
$62,817,040
Bonds Payable (Par Value)
$55,000,000
Premium on Bonds Payable (62817040 - 55000000)
$7,817,040
Year 1Dec.31
Interest Expense (2475000 - 390852)
$2,084,148
Premium on Bonds Payable (Amortization)
$390,852
Cash Interest Payable (Par Value 55,000,000*9%*1/2)
$2,475,000
Year 1Dec.31
Interest Payable
$2,475,000
Cash
$2,475,000
Year 1Dec.31
Income Summary
$2,084,148
Interest Expense
$2,084,148
(Closed Interest Expense account to Income Summary)
Year 2 June 30
Interest Expense (2475000 - 390852)
$2,084,148
Premium on Bonds Payable (Amortization)
$390,852
Interest Payable (Par Value 55,000,000*9%*1/2)
$2,475,000
Year 2 June 30
Interest Payable
$2,475,000
Cash
$2,475,000
Year 2 Dec 31
Interest Expense (2475000 - 390852)
$2,084,148
Premium on Bonds Payable (Amortization)
$390,852
Interest Payable (Par Value 55,000,000*9%*1/2)
$2,475,000
Year 2 Dec 31
Interest Payable
$2,475,000
Cash
$2,475,000
Year 2 June 30
Income Summary
$4,168,296
Interest Expense
$4,168,296
(Closed Interest Expense account to Income Summary)
Year 3 June 30
Bonds Payable (Par Value)
$55,000,000
Premium on Bonds Payable
$6,253,632
Cash (Par Value 55,000,000*103%)
$56,650,000
Loss on Redemption of Bonds (Balancing figure)
$4,603,632
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.