Question

Question 3

On January 1, 2018, Carvel Corp. issued five-year bonds with a face value of $480,000 and a coupon interest rate of 6%, with interest payable semi-annually. Assume that the company has a December 31 year-end and records adjusting entries annually.

Record the journal entries relating to the bonds on January 1, July 1, and December 31, assuming that when the bonds were sold, the market interest rate was 7%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

DATE	ACCOUNT TITLES AND EXPLANATION	DEBIT	CREDIT
JAN 1ST
JULY 1ST
DEC 31ST

Answer 1

Journal Entries:

Date	Account title and Explanation	Debit	Credit
Jan 1,2018	Cash	$460,041
	Discount on bonds payable	$19,959
	Bonds payable		$480,000
	[To record issuance of bonds]
July 1,2018	Interest expense [$460,041 x 3.5%]	$16,101
	Discount on bonds payable		$1,701
	Cash		$14,400
	[To record payment of interest]
Dec 31,2018	Interest expense [($460,041+ $1,701) x 3.5% ]	$16,161
	Discount on bonds payable		$1,761
	Cash		$14,400
	[To record payment of interest]

Calculations:

Interest payment = $480,000 x 6% x 6/12 = $14,400

Present value of interest payments	$119,759
[$14,400 x 8.31661 present value annuity factor (3.5%, 10 years]
Present value of face value	$340,282
[$480,000 x 0.70892 present value factor (3.5%, 10 years)]
Issue price of the bonds	$460,041

Please note that problem solved under 'Effective interest method'.