Question

Question 3 On January 1, 2018, Carvel Corp. issued five-year bonds with a face value of $640,000 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 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit Jan. 1 July 1 Dec. 31

Answer 1

Solution:

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	$640,000.00	$499,968
Interest (Annuity)	8.75206	$19,200.00	$168,040
Price of bonds			$668,008

Journal Entries - Carvel Corp.
Date	Particulars	Debit	Credit
1-Jan	Cash Dr	$668,008.00
	To Bond Payable		$640,000.00
	To Premium on Bond Payable		$28,008.00
	(To record issue of bond)
1-Jul	Interest expense Dr ($668,008*2.5%)	$16,700.00
	Premium on bond payable Dr	$2,500.00
	To Cash		$19,200.00
	(To record interest payment)
31-Dec	Interest expense Dr [($668,008 - $2,500)*2.50%]	$16,638.00
	Premium on bond payable Dr	$2,562.00
	To Interest payable		$19,200.00
	(To record interest accrued and premium amortized)