Eagle Corporation sold $400,000, 896, 10-year bonds on December 31, 2013 at 98.
ID: 2567148 • Letter: E
Question
Eagle Corporation sold $400,000, 896, 10-year bonds on December 31, 2013 at 98. The bonds pay interest semiannually on June 30th and December 31st. The company uses otrashed n aaartzation for premiums and discounts. Financial statements are prepared annually (1) Prepare the journal entry on December 31,2013 to record the issuance of the bonds. (3 points) - (2) Prepare the journal entry necessary on June 30th to record the first interest payment. (3 points) (3) Calculate the carrying value of the bonds at the end of the sixth year (December 31 2019). (2 points) (4) Calculate the total cost of borrowing. (2 points) Bonus: Calculate the carrying value of the bonds on December 31,2013. (2 points)Explanation / Answer
Solution:
Par Value of the bonds = $400,000
Issue Price of the bonds = Par Value $400,000 * 98% = $392,000
Issue Price is less than Par Value. It means bonds are issued at Discount.
Discount on Bonds Payable = Par Value $400,000 – Issue Price $392,000 = $8,000
Semi Annual Interest Payment = Par Value $400,000 * 8% * ½ = $16,000
Semi Annual Maturity Period = 10*2 = 20
Semi Annual Amortization of Discount on Bonds Payable using straight line method = $8,000 / 20 = $400
Semi Annual Interest Expense to be recorded = Semi Annual Cash Interest Payment + Semi Annual Amortization of Discount
= $16,000 + 400
= $16,400
1) Journal Entry on Dec 31, 2013 to record the issuance of the bonds
Date
Account Titles and Explanation
Debit
Credit
Dec.31, 2013
Cash
$392,000
Discount on Bonds Payable
$8,000
Bonds Payable
$400,000
(Bonds are issued at discount recorded)
2) Journal Entry on June 30 to record the first interest payment
Date
Account Titles and Explanation
Debit
Credit
June.30, 2014
Interest Expense
$16,400
Cash Interest Payable
$16,000
Discount on Bonds Payable (Amortization)
$400
(First semi annual interest payment recorded)
3) Carrying Value at the end of the bonds at the sixth year = Par Value of the bonds – Unamortized Portion of Discount on Bonds Payable
= $400,000 – (8,000 – $400 * Amortized Discount of 6 year *2)
= $400,000 – (8,000 – 4800)
= 400,000 - $3,200
= $396,800
4) Total Borrowing Cost = Par Value + Total Interest Paid during the life of bonds – Issue Price
= 400,000 + (400,000*8%*10 yrs) - $392,000
= 400,000 + $320,000 – 392,000
= $328,000
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Date
Account Titles and Explanation
Debit
Credit
Dec.31, 2013
Cash
$392,000
Discount on Bonds Payable
$8,000
Bonds Payable
$400,000
(Bonds are issued at discount recorded)
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