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:

Required:

Year 1 July 1 Issued $58,800,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $50,482,396. Interest is payable semiannually on December 31 and June 30. Dec. 31 Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 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 $207,940 is combined with the semiannual interest payment. Dec. 31 Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 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 98. The balance in the bond discount account is $7,485,844 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)

Explanation / Answer

Solution:

Primary Working:

Face Value of the bonds = $58,800,000

Issue Price of the bonds = $50,482,396

Issue Price is less than the face value, it means bonds are issued at discount.

Discount on Bonds Payable = 58,800,000 – 50,482,396 = 8,317,604

Discount on bonds payable is amortized over the life of bonds.

Part 1 --- Journal Entries

Date

Account Titles

Debit

Credit

Year 1

July.1

Cash (Net cash proceeds)

$50,482,396

Discount on Bonds Payable (bal figure)

$8,317,604

Bonds Payable (face value)

$58,800,000

Dec.31

Interest Expense (207940 + 3234000)

$3,441,940

Discount on Bonds Payable (Amortization)

$207,940

Cash Interest Paid (Face value 58,800,000*11% Coupon Rate*1/2 Semi annual)

$3,234,000

Dec.31

Income Summary

$3,441,940

Interest Expense

$3,441,940

Year 2

June.30

Interest Expense (207940 + 3234000)

$3,441,940

Discount on Bonds Payable (Amortization)

$207,940

Cash Interest Paid (Face value 58,800,000*11% Coupon Rate*1/2 Semi annual)

$3,234,000

Dec.31

Interest Expense (207940 + 3234000)

$3,441,940

Discount on Bonds Payable (Amortization)

$207,940

Cash Interest Paid (Face value 58,800,000*11% Coupon Rate*1/2 Semi annual)

$3,234,000

Dec.31

Income Summary (3441940+3441940)

$6,883,880

Interest Expense

$6,883,880

Year 3

June.30

Bonds Payable

$58,800,000

Loss on Redemption of Bonds (Bal figure)

$6,309,844

Discount on Bonds Payable (unamortized portion)

$7,485,844

Cash (face value 58,800,000*98%)

$57,624,000

Note – Redemption of Bonds

Carrying Value of the bonds on June 30, Year 3 = Face Value of the bonds – Unamortized Bond Discount

= 58,800,000 – (Total Discount 8,317,604 – Amortized Discount 207,940*4 times)

= 58,800,000 – 7,485,844

= 51,314,156

Amount paid to redeem the bonds = Face Value x 98% = 58,800,000 * 98% = $57,624,000

Loss on Redemption = amount paid to redeem the bonds - Carrying Value

= 57,624,000 – 51,314,156

= 6,309,844

Part 2 --

Amount of the Interest Expense in

(a) Year 1 = $3,441,940

(b) Year 2 = $6,883,880

Part 3 --- Carrying Value of the bonds as of December 31, year 2

Carrying Value = Face value of the bonds - Unamortized Bond Discount balance as on Dec 31, Year 2

= 58,800,000 - (Total Discount 8,317,604 – Amortized Discount 207,940*3 times till Dec 31, Year 2)

= 58,800,000 - 7,693,784

= 51,106,216

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Date

Account Titles

Debit

Credit

Year 1

July.1

Cash (Net cash proceeds)

$50,482,396

Discount on Bonds Payable (bal figure)

$8,317,604

Bonds Payable (face value)

$58,800,000

Dec.31

Interest Expense (207940 + 3234000)

$3,441,940

Discount on Bonds Payable (Amortization)

$207,940

Cash Interest Paid (Face value 58,800,000*11% Coupon Rate*1/2 Semi annual)

$3,234,000

Dec.31

Income Summary

$3,441,940

Interest Expense

$3,441,940

Year 2

June.30

Interest Expense (207940 + 3234000)

$3,441,940

Discount on Bonds Payable (Amortization)

$207,940

Cash Interest Paid (Face value 58,800,000*11% Coupon Rate*1/2 Semi annual)

$3,234,000

Dec.31

Interest Expense (207940 + 3234000)

$3,441,940

Discount on Bonds Payable (Amortization)

$207,940

Cash Interest Paid (Face value 58,800,000*11% Coupon Rate*1/2 Semi annual)

$3,234,000

Dec.31

Income Summary (3441940+3441940)

$6,883,880

Interest Expense

$6,883,880

Year 3

June.30

Bonds Payable

$58,800,000

Loss on Redemption of Bonds (Bal figure)

$6,309,844

Discount on Bonds Payable (unamortized portion)

$7,485,844

Cash (face value 58,800,000*98%)

$57,624,000

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