Eagle Corporation sold $500,000, 8%, 10-year bonds on January 1, 2014. The bonds
ID: 2451006 • Letter: E
Question
Eagle Corporation sold $500,000, 8%, 10-year bonds on January 1, 2014. The bonds pay interest semiannually on June 30th and December 31st. The company uses straight-line amortization for premiums and discounts. Financial statements are prepared annually.
1. Prepare the journal entry on January 1, 2014 to record the issuance of the bonds assuming they sold at 99. (3 points)
2. Prepare the journal entry necessary on June 30th to record the first interest payment, assuming the bonds sold at 99. (3 points)
3. Calculate the carrying value of the bonds at the end of the fifth year (December 31, 2018). (2 points)
4. Calculate the total cost of borrowing. (2 points)
Explanation / Answer
Bond face value 500,000 Bond Issue Price 495,000 Bond discount 5,000 Bond maturity in months 120 Discount amortization per month 41.67 Interest per year 40,000 Interest in 10 years 400,000.00 4 Total cost of borrowing (interest+discount) 405,000.00 Half yearly interest 20,000.00 Half yearly discount amortization 250.00 Journal Entry Account DR $ Cr $ 1 Jan 1.2014. Cash 495,000 Bond Payable 500,000 Bond Payable Discount 5,000 2 Account DR $ Cr $ Jun 30.2014. Interest Payable 20,000 Interest Expense 19,750 Bond Payable Discount 250 3 At the end of 5th year: Bond discount amortized will be = 60*41.67 = 2,500 De 31.2018. Bond Payable Cr 500,000 Bond Payable Discount Dr (5,000) Bond Payable Discount Cr 2,500 Total carrying Value of Bond 497,500
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