Eagle Corporation sold $500,000, 8%, 10-year bonds on January 1, 2014. The bonds

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. Prepare the journal entry on January 1, 2014 to record the issuance of the bonds assuming they sold at 99.Prepare the journal entry necessary on June 30th to record the first interest payment, assuming the bonds sold at 99. Calculate the carrying value of the bonds at the end of the fifth year (December 31, 2018). Calculate the total cost of borrowing.

Explanation / Answer

1.

Cash A/C Dr 495,000

Discount on issue A/C Dr 5,000

To 8 % Bonds A/C 500,000

(For 5000 bonds issued at a discount)

   To outstanding interest A/C 20,000

(For semi-annual interest accrued on bonds )

Outstanding Interest A/C Dr 20,000

   To Cash A/C 20,000

(For semi-annual interest paid)

3.Carrying value of the bond at the end of 5 years

If the bond is a long-term liability, both Bonds Payable and Discount on Bonds Payable will be reported on the balance sheet as long-term liabilities. The combination or net of these two accounts is known as the book value or the carrying value of the bonds.

When the same amount of bond discount is recorded each year, it is referred to as straight-line amortization. In this example, the straight-line amortization would be 500 (5000 divided by the 10-year life of the bond).

By the end of 5 years ,the balance in the discount on issue will be amortized upto $2500.

Carrying value of bond =500,000-2,500=497500

4.

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