Entries for Bonds Payable and Installment Note Transactions

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

Year 1

July 1. Issued $3,980,000 of five-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 11%, receiving cash of $3,680,004. Interest is payable semiannually on December 31 and June 30.

Oct. 1. Borrowed $380,000 by issuing a 10-year, 8% installment note to Intexicon Bank. The note requires annual payments of $57,631, with the first payment occurring on September 30, Year 2.

Dec. 31. Accrued $7,600 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 $30,000 is combined with the semiannual interest payment.

Year 2

June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $30,000 is combined with the semiannual interest payment.

Sept. 30. Paid the annual payment on the note, which consisted of interest of $30,400 and principal of $27,231.

Dec. 31. Accrued $7,055 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 $30,000 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 $179,998 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 $28,222 and principal of $29,409.

Required:

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.