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.

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(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 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 1st	Cash	$501,006
	Bonds payable		$480,000
	Premium on bonds payable		$21,006
	[To record issuance of bonds payable]
July 1st	Interest expense [501,006 x 2.5%]	$12,525
	Premium on bonds payable	$1,875
	Cash		$14,400
	[To record interest payment]
Dec 31st	Interest expense [(501,006-1,875) x 2.5%]	$12,478
	Premium on bonds payable	$1,922
	Interest payable		$14,400
	[To record accrued interest expense]

Calculations:

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

Present value of interest payments	$126,030
[$14,400 x 8.75206 present value annuity factor (2.5%, 10 years)
Present value of face value	$374,976
[$480,000 x 0.78120 present value factor (2.5%, 10 years)]
Issue price of the bonds	$501,006