2014
July 1. Issued $88,000,000 of 10-year, 10% callable bonds dated July 1, 2014, at a market (effective) rate of 12%, receiving cash of $77,906,048. Interest is payable semiannually on December 31 and June 30.
Oct. 1. Borrowed $240,000 by issuing a five-year, 5% installment note to Setzer Bank. The note requires annual payments of $55,434, with the first payment occurring on September 30, 2015.
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 is amortized annually in a separate journal entry.
31. Recorded bond discount amortization of $504,698, which was determined using the straight-line method.
31. Closed the interest expense account.
2015
June 30. Paid the semiannual interest on the bonds. The bond discount is amortized annually in a separate journal entry.
Sept. 30. Paid the annual payment on the note, which consisted of interest of $12,000 and principal of $43,434.
Dec. 31. Accrued $2,457 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 is amortized annually in a separate journal entry.
31. Recorded bond discount amortization of $1,009,396, which was determined using the straight-line method.
31. Closed the interest expense account.
2016
June 30. Recorded the redemption of the bonds, which were called at 97. The balance in the bond discount account is $8,075,160 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 $9,828 and principal of $45,606.
Instructions
1. Journalize the entries to record the foregoing transactions.
2. Indicate the amount of the interest expense in (a) 2014 and (b) 2015.
3. Determine the carrying amount of the bonds as of December 31, 2015.
Answer:
1. 2014
July 1 Cash 77,906,048
Discount on Bonds Payable 10,093,952
Bonds Payable 88,000,000
Oct. 1 Cash 240,000
Notes Payable 240,000
Dec. 31 Interest Expense 3,000
Interest Payable 3,000
31 Interest Expense 4,400,000
Cash 4,400,000
31 Interest Expense 504,698
Discount on Bonds Payable 504,698
31 Income Summary 4,907,698
Interest Expense 4,907,698
2015
June 30 Interest Expense 4,400,000
Cash 4,400,000
Sept. 30 Interest Expense 9,000
Interest Payable 3,000
Notes Payable 43,434
Cash 55,434
Dec. 31 Interest Expense 2,457
Interest Payable 2,457
31 Interest Expense 4,400,000
Cash 4,400,000
31 Interest Expense 1,009,395
Discount on Bonds Payable 1,009,395
31 Income Summary 9,820,852
Interest Expense 9,820,852
2016
June 30 Bonds Payable 88,000,000
Loss on Redemption of Bonds 5,435,160
Discount on Bonds Payable 8,075,160
Cash* 85,360,000
* $88,000,000 × 0.97
2016
Sept. 30 Interest Expense 7,371
Interest Payable 2,457
Notes Payable 45,606
Cash 55,434
2. a. 2014: $4,907,698
b. 2015: $9,820,853
3. Initial carrying amount of bonds…………………………………………………… $77,906,048
Discount amortized on December 31, 2014…………………………………… 504,698
Discount amortized on December 31, 2015……………………………………… 1,009,395
Carrying amount of bonds, December 31, 2015………………………………… $79,420,141