Question

Question 3 On January 1, 2018, Carvel Corp. issued five-year bonds with a face value of $490,000 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. (a) 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 5%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to o decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit Jan. 1 Cash 490000 Bonds Payable 490000 July 1 Dec. 31

Answer 1

Ans:

Solution a:

Computation of bond price
Table values are based on:
n=	10
i=	2.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.78120	$490,000.00	$382,788
Interest (Annuity)	8.75206	$14,700.00	$128655
Price of bonds			$511,443

Journal Entries
Date	Particulars	Debit	Credit
1-Jan	Cash Dr	$511,443
	Bond Payable		$490,000.00
	Premium on Bond Payable		$21443
	(To record issue of bond at premium)
1-Jul	Interest expense Dr ($511443*2.50%)	$12786
	Premium on bond payable Dr	$1914
	Cash		$14700
	(To record interest payment and premium amortization)
31-Dec	Interest expense Dr [($511443 - $1914)*2.50%]	$12738
	Premium on bond payable Dr	$1962
	Interest Payable		$14700
	(To record interest accrued and premium amortization)