The following transactions were completed by Hobson Inc., whose fiscal year is the calendar year:
2010
July 1. Issued $10,000,000 of 10-year, 15% callable bonds dated July 1, 2010, at an effective rate of 11%, receiving cash of $12,390,085. Interest is payable semiannually on December 31 and June 30.
Oct. 1. Borrowed $225,000 as a six-year, 8% installment note from Titan Bank. The note requires annual payments of $48,671, with the first payment occurring on September 30, 2011.
Dec. 31. Accrued $4,500 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.
31. Recorded bond premium amortization of $119,504, which was determined using the straight-line method.
31. Closed the interest expense account.
2011
June 30. Paid the semiannual interest on the bonds.
Sept. 30. Paid the annual payment on the note, which consisted of interest of $18,000 and principal of $30,671.
Dec. 31. Accrued $3,887 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.
31. Recorded bond premium amortization of $239,008, which was determined using the straight-line method.
31. Closed the interest expense account.
2012
June 30. Recorded the redemption of the bonds, which were called at 101.5. The balance in the bond premium account is $1,912,069 after payment of interest and amortization of premium have been recorded. (Record the redemption only.)
Sept. 30. Paid the second annual payment on the note, which consisted of interest of $15,546 and principal of $33,125.
Instructions
1. Journalize the entries to record the foregoing transactions.
2. Indicate the amount of the interest expense in (a) 2010 and (b) 2011.
3. Determine the carrying amount of the bonds as of December 31, 2011.