Question

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

2016
July	1	Issued $39,500,000 of 20-year, 7% callable bonds dated July 1, 2016, at a market (effective) rate of 8%, receiving cash of $35,590,960. Interest is payable semiannually on December 31 and June 30.
Oct.	1	Borrowed $200,000 by issuing a six-year, 4% installment note to Nicks Bank. The note requires annual payments of $38,152, with the first payment occurring on September 30, 2017.
Dec.	31	Accrued $2,000 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 $97,726 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
2017
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $97,726 is combined with the semiannual interest payment.
Sept.	30	Paid the annual payment on the note, which consisted of interest of $8,000 and principal of $30,152.
Dec.	31	Accrued $1,698 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 $97,726 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
2018
June	30	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $3,518,136 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 $6,794 and principal of $31,358.

Required:

1.	Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.
2.	Indicate the amount of the interest expense in (a) 2016 and (b) 2017.
3.	Determine the carrying amount of the bonds as of December 31, 2017.

Chart of Accounts

CHART OF ACCOUNTS
Winklevoss Inc.
General Ledger
ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable 122 Allowance for Doubtful Accounts 126 Interest Receivable 127 Notes Receivable 131 Merchandise Inventory 141 Office Supplies 142 Store Supplies 151 Prepaid Insurance 191 Land 192 Store Equipment 193 Accumulated Depreciation-Store Equipment 194 Office Equipment 195 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 221 Salaries Payable 231 Sales Tax Payable 232 Interest Payable 241 Notes Payable 251 Bonds Payable 252 Discount on Bonds Payable 253 Premium on Bonds Payable EQUITY 311 Common Stock 312 Paid-In Capital in Excess of Par-Common Stock 315 Treasury Stock 321 Preferred Stock 322 Paid-In Capital in Excess of Par-Preferred Stock 331 Paid-In Capital from Sale of Treasury Stock 340 Retained Earnings 351 Cash Dividends 352 Stock Dividends 390 Income Summary	REVENUE 410 Sales 610 Interest Revenue 611 Gain on Redemption of Bonds EXPENSES 510 Cost of Merchandise Sold 515 Credit Card Expense 516 Cash Short and Over 521 Sales Salaries Expense 522 Office Salaries Expense 531 Advertising Expense 532 Delivery Expense 533 Repairs Expense 534 Selling Expenses 535 Rent Expense 536 Insurance Expense 537 Office Supplies Expense 538 Store Supplies Expense 541 Bad Debt Expense 561 Depreciation Expense-Store Equipment 562 Depreciation Expense-Office Equipment 590 Miscellaneous Expense 710 Interest Expense 711 Loss on Redemption of Bonds

Journal

1. Journalize the entries to record the transactions. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT
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Final Questions

2. Indicate the amount of the interest expense in (a) 2016 and (b) 2017.

2016:
2017:

3. Determine the carrying amount of the bonds as of December 31, 2017.

Answer 1

ANSWER

Journal Entries
date	explanation	debit	credit
2016
1-Jul	cash	35590960
	discount on bonds	3909040
	bonds payable		39500000
1-Oct	cash	200000
	notes payable		200000
31-Dec	interest expense	2000
	accrued interest expense		2000
31-Dec	interest expense	1480226
	cash		1382500
	discount on bonds		97726
31-Dec	income summary	1482226
	interest expense		1482226
2017
30-Jun	interest expense	1480226
	cash		1382500
	discount on bonds		97726
30-Sep	notes payable	30152
	interest expense	6000
	accrued interest expense	2000
	cash		38152
31-Dec	interest expense	1698
	accrued interest expense		1698
31-Dec	interest expense	1480226
	cash		1382500
	discount on bonds		97726
31-Dec	income summary	1481924
	interest expense		1481924
2018
30-Jun	bond payable	39500000
	cash		38710000
	discount on bonds		3713588
	profit on redemption on bonds		2923588
30-Sep	notes payable	31358
	interest expense	5096
	accrued interest expense	1698
	cash		38152
2-	Interest expense	2016	1482226
	Interest expense	2017	1481924
3-	7/1/2016	Carrying value of bond	35590960
	12/31/2017	discount amortized	97726
	12/31/2016	carrying value of bond	35688686
	12/31/2017	discount amortized	97726
	12/31/2017	carrying value of bond	35786412
	selling price	98% of face value	38710000
	selling price	98% of face value	38710000
	12/31/2017	carrying value of bond	35786412
	gain on redemption on bond		2923588

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