2014
July 1. 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.
Oct. 1. 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.
Dec. 31. Accrued $9,000 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 premium is amortized annually in a separate journal entry.
31. Recorded bond premium amortization of $390,852 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 premium is amortized annually in a separate journal entry.
Sept. 30. Paid the annual payment on the note, which consisted of interest of $36,000 and principal of $61,342.
Dec. 31. Accrued $7,773 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 premium is amortized annually in a separate journal entry.
31. Recorded bond premium amortization of $781,704, 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 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.)
Sept. 30. Paid the second annual payment on the note, which consisted of interest of $31,093 and principal of $66,249.
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 62,817,040
Premium on Bonds Payable 7,817,040
Bonds Payable 55,000,000
Oct. 1 Cash 450,000
Notes Payable 450,000
Dec. 31 Interest Expense 9,000
Interest Payable 9,000
31 Interest Expense 2,475,000
Cash 2,475,000
31 Premium on Bonds Payable 390,852
Interest Expense 390,852
31 Income Summary 2,093,148
Interest Expense 2,093,148
2015
June 30 Interest Expense 2,475,000
Cash 2,475,000
Sept. 30 Interest Expense 27,000
Interest Payable 9,000
Notes Payable 61,342
Cash 97,342
Dec. 31 Interest Expense 7,773
Interest Payable 7,773
31 Interest Expense 2,475,000
Cash 2,475,000
31 Premium on Bonds Payable 781,704
Interest Expense 781,704
31 Income Summary 4,203,069
Interest Expense 4,203,069
2016
June 30 Bonds Payable 55,000,000
Premium on Bonds Payable 6,253,632
Gain on Redemption of Bonds 4,603,632
Cash* 56,650,000
*$55,000,000 × 1.03
2016
Sept. 30 Interest Expense 23,320
Interest Payable 7,773
Notes Payable 66,249
Cash 97,342
2. a. 2014: $2,093,148
b. 2015: $4,203,069
3. Initial carrying amount of bonds………………………………………………… $62,817,040
Premium amortized on December 31, 2014…………………………………… (390,852)
Premium amortized on December 31, 2015…………………………………… (781,704)
Carrying amount of bonds, December 31, 2015……………………………… $61,644,484