Question

Question 2 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. (a) Your answer is correct. Prepare a partial bond amortization table for the first two interest payments assuming that interest is paid on July 1 and January 1 and that the bonds sold when the market interest rate was 5%. (Round answers to 0 decimal places, e.g. 5,255.) CARVEL CORP. Bond Premium Amortization On January 1, 2018 Interest Expense Premium Amortization Semi-annual Interest Periods Interest Payment Unamortized Premium Bond Carrying Amount 21005 Jan. 1/18 $ 501005 14400 12525 T 1875 19130 July 1/18 499130 14400 12478 Jan. 1/19 I 17208 1922 1 497208

Answer 1

Correct Answer:

Effective Interest Amortization Table
Formula Used	(480,000*6%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (6%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
	Changes during the bond			Ending bond liability balance
Date	cash paid	Interest Expense	Discount Amortized	Carrying value of Bond
01 January 2018		-	-	$                4,80,000
01 July 2018	$                            14,400	$                                       14,400	$                             -	$                4,80,000
01 January 2019	$                            14,400	$                                       14,400	$                             -	$                4,80,000

Note: since the market rate of interest is equal to the effective rate of interest that is offered on the bond, therefore the bond will be issued at Par.

Working:

Semi-Annually		Formula Applied
Face Value of Bond	$                         4,80,000
Interest Semi-Annually @ 6%/2	$                            14,400	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate r = ( 6%/2)	0.0300	6%
Time Period (n) 5 * 2 years	10.00	5
Present Value of Face Value of Bond	$            3,57,165.07915	Face Value/(1+r%)^2n
Present Value of Interest payment	$                   1,22,834.92	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                         4,80,000	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                                      -	Issue Price - Face Value of Bonds

End of answer.

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