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.
Dec. 31 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
31 Closed the interest expense account.
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.
Dec. 31 Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
31 Closed the interest expense account.
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.)
Required:
1. Journalize the entries to record the 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) Year 1 and (b) Year 2.
3. Determine the carrying amount of the bonds as of December 31, Year 2.

1. The journal entry records are the following:

1-jul year 1                                Debit                           Credit

Cash                                        $63,532,267

discount on bonds payable   $10,467,733

                                                   bonds payable    $74,000,000

31-dec year 1                                Debit                           Credit

Interest expense                      $4,331,693

                                  discount on bonds payable     $261,693

                                                   Cash                          $4,070,000

31-dec year 1                                Debit                           Credit

Income Summary                     $4,331,693

                                  Interest expense                        $4,331,693

30-jun year 2                               Debit                           Credit

Interest expense                      $4,331,693

                                  discount on bonds payable     $261,693

                                                   Cash                          $4,070,000

31-dec year 2                               Debit                           Credit

Interest expense                      $4,331,693

                                  discount on bonds payable     $261,693

                                                   Cash                          $4,070,000

Income Summary                     $8,663,386

                                  Interest expense                        $8,663,386

30-jun year 3                                Debit                           Credit

Bond payable                         $74,000,000

Loss on redemption              $7,940,961

                                                   Cash                            $9,420,961

                                          discount on bonds payable $72,520,000

2. a. The amount of the interest expense in Year 1 is $4,331,693

b. The amount of the interest expense in Year 2 is $8,663,386

3. The carrying amount of the bonds as of December 31, Year 2 is $64,317,346.

Explanation:

First, to journalize the entry record for 1-jul of year 1 we have to calculate the discount on bonds payable as follows:

discount on bonds payable=$74,000,000-$63,532,267=$10,467,733

1. Therefore, journal for entry record for 1-jul of year 1 is:

1-jul year 1                                Debit                           Credit

Cash                                        $63,532,267

discount on bonds payable   $10,467,733

                                                   bonds payable    $74,000,000

To journalize the entry record for 31 decl of year 1 we have to calculate the cash as follows:

Cash=$74,000,000×11%×1/2

Cash=$4,070,000

Therefore, journal for entry record for 31-dec of year 1 is:

31-dec year 1                                Debit                           Credit

Interest expense                      $4,331,693

                                  discount on bonds payable     $261,693

                                                   Cash                          $4,070,000

31-dec year 1                                Debit                           Credit

Income Summary                     $4,331,693

                                  Interest expense                        $4,331,693

To journalize the entry record for 30 jun of year 2 we have to calculate the cash as follows:

Cash=$74,000,000×11%×1/2

Cash=$4,070,000

Therefore, journal for entry record for 30-jun of year 2 is:

30-jun year 2                               Debit                           Credit

Interest expense                      $4,331,693

                                  discount on bonds payable     $261,693

                                                   Cash                          $4,070,000

journal for entry record for 31-dec of year 2 is:

31-dec year 2                               Debit                           Credit

Interest expense                      $4,331,693

                                  discount on bonds payable     $261,693

                                                   Cash                          $4,070,000

31-dec year 2                              Debit                           Credit

Income Summary                     $8,663,386

                                  Interest expense                        $8,663,386

Journal for entry record for 30-jun of year 3 is:

30-jun year 3                                Debit                           Credit

Bond payable                         $74,000,000

Loss on redemption              $7,940,961

                                                   Cash                            $9,420,961

                                          discount on bonds payable $72,520,000

2.

a. The amount of the interest expense in Year 1 is $4,331,693

b. The amount of the interest expense in Year 2= interest expense on bonds payable June 30+interest expense on bonds payable Dec 31=$4,331,693+$4,331,693=$8,663,386

3. The carrying amount of the bonds as of December 31, Year 2=Issue price of bonds-discount amortized

Discount amortized=$9,420,961- $261,693=$9,682,654

The carrying amount of the bonds as of December 31, Year 2=$74,000,000-$9,682,654=$64,317,346