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 $74,000,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $63,532,267. Interest is payable semiannually on December 31 and June 30. Oct. 1 Borrowed $200,000 by issuing a six-year, 6% installment note to Nicks Bank. The note requires annual payments of $40,673, with the first payment occurring on September 30, Year 2. Dec. 31 Accrued $3,000 of interest on the installment note. The interest is payable on the date of the next installment note payment. 31 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment. Year 2 June 30 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment. Sept. 30 Paid the annual payment on the note, which consisted of interest of $12,000 and principal of $28,673. Dec. 31 Accrued $2,570 of interest on the installment note. The interest is payable on the date of the next installment note payment. 31 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment. Year 3 June 30 Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $9,420,961 after payment of interest and amortization of discount have been recorded. Record the redemption only. Sept. 30 Paid the second annual payment on the note, which consisted of interest of $10,280 and principal of $30,393. Required: 1. Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles. 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.

Explanation / Answer

Date Account Title Debit Credit Year 1 Jul.1 Cash 63532267 Discount on Bonds Payable(74000000-63532267) 10467733 Bonds payable 74000000 Oct.1 Cash 200000 Installment Note 200000 31-Dec Interest expense 3000 Interest payable 3000 (on install. Note) 31-Dec Interest expense 4331693 Discount on Bonds Payable(10467733/40) 261693 Cash(74000000*11%/2) 4070000 Year 2 30-Jun Interest expense 4331693 Discount on Bonds Payable(10467733/40) 261693 Cash(74000000*11%/2) 4070000 30-Sep Interest payable 3000 Interest expense 9000 Installment Note 28673 Cash 40673 31-Dec Interest expense 2570 Interest payable 2570 (on install. Note) Interest expense 4331693 Discount on Bonds Payable(10467733/40) 261693 Cash(74000000*11%/2) 4070000 Year 3 30-Jun Bonds payable 74000000 Loss on early redemption 7940961 Cash 74000000*98% 72520000 Discount on Bonds Payable 9420961 30-Sep Interest payable 2570 Interest expense(10280-2570) 7710 Installment Note 30393 Cash 40673 Installment note amortisation Oct.1,Yr.1 200000 Sep.30 Yr.2 40673 12000 28673 171327 Sep.30 Yr.3 40673 10280 30393 140934 Sep.30 Yr.4 40673 8456 32217 108717 Sep.30 Yr.5 40673 6523 34150 74567 Sep.30 Yr.6 40673 4474 36199 38368 Sep.30 Yr.7 40673 2302 38371 -3 244038 44035 Bond amortisation No.of periods Stated semi-annual int.FV*5.5% Stated Int+Disc amort. Disc. Amort. Debit bal. in bond discount Cr. Bal. in Bonds payable Carrying value 0 10467733 74000000 63532267 1 4070000 4331693 261693 10206040 74000000 63793960 2 4070000 4331693 261693 9944347 74000000 64055653 3 4070000 4331693 261693 9682654 74000000 64317346 4 4070000 4331693 261693 9420961 74000000 64579039 JE that had been passed on Jun 30 Interest expense 4331693 Discount on Bonds Payable(10467733/40) 261693 Cash(74000000*11%/2) 4070000 Now, on redemption Bonds payable 74000000 Loss on early redemption 7940961 Discount on Bonds Payable 9420961 Cash 74000000*98% 72520000 As discount is amortised at the same amt.of 261693 every half-year & stated interest is also fxed for that period, interest expensed for each half-year is also fixed at   4331693 (Stated int+disc.amort.) Carrying value of the bond= 74000000-9420961=64579039

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