Question

The following transactions were completed by Montague Inc., whose fiscal year is the calendar year: Year...

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

Year 1
July 1. Issued $6,330,000 of five-year, 6% callable bonds dated July 1, Year 1, at a market (effective) rate of 8%, receiving cash of $5,816,579. Interest is payable semiannually on December 31 and June 30.
Oct. 1. Borrowed $200,000 as a 10-year, 6% installment note from Intexicon Bank. The note requires annual payments of $27,174, 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.
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $51,342 is combined with the semiannual interest payment.
Year 2
June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $51,342 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 $15,174.
Dec. 31. Accrued $2,772 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $51,342 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 $308,053 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 $11,090 and principal of $16,084.

Required:

1. Journalize the entries to record the foregoing transactions. For compound transactions, if an amount box does not require an entry, leave it blank or enter "0". When required, round your answers to the nearest dollar.

2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.

a. Year 1   $

b. Year 2   $

3. Determine the carrying amount of the bonds as of December 31, Year 2.
$

Homework Answers

Answer #1
  • All working forms part of the answer wherever required.
  • Requirement 1

Date

Account title

Debit

Credit

Working

Year 1

01-Jul

Cash

$                  58,16,579.00

Discount on Bonds Payable

$                    5,13,421.00

Bonds payable

$                         63,30,000.00

01-Oct

Cash

$                    2,00,000.00

Notes Payable

$                           2,00,000.00

Dec-31

Interest expense

$                          3,000.00

[3 months' accrued]

interest payable

$                                 3,000.00

Dec-31

Interest expense

$                    2,41,242.00

[51342 + 189900]

Discount on Bonds Payable

$                               51,342.00

[given]

Cash

$                           1,89,900.00

[6330000 x 6% x 6/12]

Year 2

30-Jun

Interest expense

$                    2,41,242.00

[51342 + 189900]

Discount on Bonds Payable

$                               51,342.00

[given]

Cash

$                           1,89,900.00

[6330000 x 6% x 6/12]

30-Sep

Notes Payable

$                        15,174.00

[given]

Interest payable

$                          3,000.00

[credited above]

Interest expense

$                          9,000.00

[ 9 month's interest]

Cash

$                               27,174.00

[15174 + 12000]

31-Dec

Interest expense

$                          2,772.00

[3 months' accrued]

Interest payable

$                                 2,772.00

31-Dec

Interest expense

$                    2,41,242.00

[51342 + 189900]

Discount on Bonds Payable

$                               51,342.00

[given]

Cash

$                           1,89,900.00

[6330000 x 6% x 6/12]

Year 3

30-Jun

Bonds payable

$                  63,30,000.00

[book value]

Loss on redemption

$                    1,81,453.00

[308053 + 6203400 - 6330000]

Discount on Bonds Payable

$                           3,08,053.00

[given]

Cash

$                         62,03,400.00

[6330000 x 98%]

30-Sep

Notes Payable

$                        16,084.00

[given]

Interest payable

$                          2,772.00

[credited above]

Interest expense

$                          8,318.00

[9 months]

Cash

$                               27,174.00

[11090+ 16084]

  • Requirement 2

Year 1

Interest on Notes Payable

$                             3,000.00

Interest on Bonds payable

$                       2,41,242.00

Total Interest expense

$                       2,44,242.00

Year 2

Interest on Notes Payable

30-Sep

$                             3,000.00

31-Dec

$                             2,772.00

Interest on Bonds payable

30-Jun

$                       2,41,242.00

31-Dec

$                       2,41,242.00

Total Interest expense

$                       4,88,256.00

  • Requirement 3

Bonds payable carrying amount

Beginning balance

$                     63,30,000.00

Year 1 Dec 31

$                        (51,342.00)

Year 2 June 30

$                        (51,342.00)

Year 2 Dec 31

$                        (51,342.00)

Carrying amount of Bonds as of Dec 31, Year 2

$                     61,75,974.00

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