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

Question

The following transactions were completed by Montague Inc., whose fiscal year is the calendar year. Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, 2014, at a market (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semiannually 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, 2015. Accured $9,000 of interest on the installment note. The interest is payable on the data of the next installment note payment. Paid the semiannual interest on the bonds. The bond premium is amortized annually in a separate journal entry. Recorded bond premium amortization of $390,852 which was determined using the straight line method. Closed the interest expense account 2015 Paid the semiannual interest on the bonds premium is amortized annually in a separate journal entry. Paid the annual payment on the note, which consisted of interest of $36,000 and principal of $61,342. Accrued $7,773 of interest on the installment note. The interest payable on the rate of the next installment note payment.

Explanation / Answer

Part 1)

The journal entries are given below:

2014

_______

2015

_______

2016

__________

Part 2)

The calculation of interest expense for 2014 and 2015 is already shown along with the journal entry:

2014 = $2,093,148 (9,000 + 2,475,000 - 390,852)

2015 = $4,203,069 (2,475,000 + 27,000 + 7,773 + 2,475,000 - 781,704)

__________

Part 3)

The carrying amount of bonds as of 31st December 2015:

Date Account Titles Debits Credits 01 Jul Cash $6,2,817,040 Premium on Bonds Payable $7,817,040 Bonds Payable $55,000,000 01 Oct Cash $450,000 Notes Payable $450,000 31 Dec Interest Expense (450,000*8%*3/12) $9,000 Interest Payable $9,000 31 Dec Interest Expense (55,000,000*9%*6/12) $2,475,000 Cash $2,475,000 31 Dec Premium on Bonds Payable $390,852 Interest Expense (7,817,040/10*1/2) $390,852 31 Dec Income Summary (9,000 + 2,475,000 - 390,852) $2,093,148 Interest Expense $2,093,148

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