Question

On January 1, 2018, Carvel Corp. issued five-year bonds with a face value of $620,000 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%.

Answer 1

Solution:

Chart Values are based on:
n= (5 Years*2)	10	Half years
i= (7%/2)	3.50%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Par (Maturity) Value	0.708919	*	$6,20,000	=	$4,39,530
Interest (Annuity) [$620,000*6%*6/12]	8.316605	*	$18,600	=	$1,54,689
Price of bonds					$5,94,219

Journal Entries
Date	Particulars	Debit	Credit
01-Jan	Cash A/c Dr	$5,94,219
	Discount on Bond payable Dr	$25,781
	To bonds payable		$6,20,000
	(Being bond issued at discount)
Date	Particulars	Debit	Credit
30-Jun	Interest Expense Dr ($594219*7%*6/12)	$20,798
	To Discount on bond Payable		$2,198
	To Cash ($620,000*6%*6/12)		$18,600
	(To record first Interest Payment and Amortization of Discount on issue)
Date	Particulars	Debit	Credit
31-Dec	Interest Expense Dr [($594219+ 2198)*7%*6/12]	$20,875
	To Discount on bond Payable		$2,275
	To Interest payable ($620,000*6%*6/12)		$18,600
	(To record accrual of second Interest and Amortization of discount on issue)