The following transactions were completed by Prairic Renaissance Inc.whose fis- cal year is the calendar year. 2005 July 1. Issued 8,000,000 of 5-year, 8% callable bonds dated July 1,2005,at an effective rate of 10% , receiving cash of 7,382,236. Interest is payable semiannually on December 31 and June 30 Dec. 31. Paid the semiannual interest on the bonds. 31. Recorded bond discount amortization of 61,776. which was determined by using the straight line method. 31. Closed the interest expense account 2006 June 30. Paid the semiannual interest on the bonds. Dec. 31. Paid the semiannual interest on the bonds. 31. Recorded bond discount amortization of 123,552 which was deter. mined by using the straight-line method. 31. Closed the interest expense account. 2007 June 30. Recorded the redemption of the bonds which were called at 99. The balance in the bond discount account is 370,660 after payment of inter- est and amortization of discount have been recorded.(Record the redemp- tion only.) Instructions 1. Joumalize the entries to record the foregoing transictions 2. Indicate the amount of the interest expense in (a) 2005 and (b) 2006 3. Determine the carrying amount of the bonds as of December 31 , 2006.

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The following transactions were completed by Prairic Renaissance Inc.whose fis- cal year is the calendar year. 2005 July 1. Issued 8,000,000 of 5-year, 8% callable bonds dated July 1,2005,at an effective rate of 10% , receiving cash of 7,382,236. Interest is payable semiannually on December 31 and June 30 Dec. 31. Paid the semiannual interest on the bonds. 31. Recorded bond discount amortization of 61,776. which was determined by using the straight line method. 31. Closed the interest expense account 2006 June 30. Paid the semiannual interest on the bonds. Dec. 31. Paid the semiannual interest on the bonds. 31. Recorded bond discount amortization of 123,552 which was deter. mined by using the straight-line method. 31. Closed the interest expense account. 2007 June 30. Recorded the redemption of the bonds which were called at 99. The balance in the bond discount account is 370,660 after payment of inter- est and amortization of discount have been recorded.(Record the redemp- tion only.) Instructions 1. Joumalize the entries to record the foregoing transictions 2. Indicate the amount of the interest expense in (a) 2005 and (b) 2006 3. Determine the carrying amount of the bonds as of December 31 , 2006.

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Answer 1

1. Journalize the entries to record the foregoing transactions:

2005
- July 1: Issued bonds.
- Debit: Cash $ \$7,382,236 $
- Credit: Bonds Payable $ \$8,000,000 $
- Credit: Discount on Bonds Payable $ \$617,764 $ (Calculation: $ 8,000,000 - 7,382,236 $)

- Dec. 31: Paid semiannual interest.
- Debit: Interest Expense $ \$400,000 $ (Calculation: $ 8,000,000 \times 8\% \times 6/12 $)
- Credit: Cash $ \$400,000 $

- Dec. 31: Recorded bond discount amortization.
- Debit: Discount on Bonds Payable $ \$61,776 $
- Credit: Interest Expense $ \$61,776 $

- Dec. 31: Closed interest expense account.
- Debit: Interest Expense $ \$461,776 $ (Calculation: $ 400,000 + 61,776 $)
- Credit: Income Summary $ \$461,776 $

2006
- June 30: Paid semiannual interest.
- Debit: Interest Expense $ \$400,000 $
- Credit: Cash $ \$400,000 $

- Dec. 31: Paid semiannual interest.
- Debit: Interest Expense $ \$400,000 $
- Credit: Cash $ \$400,000 $

- Dec. 31: Recorded bond discount amortization.
- Debit: Discount on Bonds Payable $ \$123,552 $
- Credit: Interest Expense $ \$123,552 $

- Dec. 31: Closed interest expense account.
- Debit: Interest Expense $ \$923,232 $ (Calculation: $ 400,000 \times 2 + 123,552 $)
- Credit: Income Summary $ \$923,232 $

2007
- June 30: Recorded redemption of bonds at 99.
- Debit: Bonds Payable $ \$8,000,000 $
- Debit: Loss on Redemption of Bonds $ \$370,660 $ (Calculation: $ 8,000,000 \times 1\% - 370,660 $)
- Credit: Cash $ \$7,929,340 $ (Calculation: $ 8,000,000 \times 99\% $)

2. Indicate the amount of the interest expense in (a) 2005 and (b) 2006:

(a) 2005: $ \$400,000 $

(b) 2006: $ \$800,000 $ (Calculation: $ 400,000 \times 2 $)

3. Determine the carrying amount of the bonds as of December 31, 2006:

- Initial carrying amount on July 1, 2005: $ \$7,382,236 $
- Total amortization by Dec. 31, 2006: $ \$185,328 $ (Calculation: $ 61,776 \times 3 $)
- Carrying amount as of Dec. 31, 2006: $ \$7,567,564 $ (Calculation: $ 7,382,236 + 185,328 $)

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