Worth amaximum of 12 points including the two-point bonus. All calculations must

Question

Worth amaximum of 12 points including the two-point bonus. All calculations must be shown to

receive full credit. Journal entries must be in proper format.

Eagle Corporation sold $400,000, 8%, 10-year bonds on December 31, 2013 at 98. 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 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

1 Cash($400000*.98) $392,000 Discount on Bonds Payable $8,000 Bonds Payable $400,000 (To record Issuance of Bond) (note:. The company issues the $400000of bonds at 98 means 98% of Par) 2 The Stright line method amortizes a constant amount each interest period in the Given case it is 10 year Using the Bond discount of $8000 eagle corporation amortize $800 to each period of 10 periods Interest Expenses($400000*8%*1/2) $16,400 Discount on bonds Payable $400 Cash $16,000 ( To record first semi annual interest Payment) 3 Schedule of Bond Discount Amortization Date Cash Paid Interest Expenses Discount Amortized Carrying Amount of Bonds 31/12/2013 $392,000 30/06/2014 $16,000 $16,400 $400 $392,400 31/12/2014 $16,000 $16,400 $400 $392,800 30/06/2015 $16,000 $16,400 $400 $393,200 31/12/2015 $16,000 $16,400 $400 $393,600 30/06/2016 $16,000 $16,400 $400 $394,000 31/12/2016 $16,000 $16,400 $400 $394,400 30/06/2017 $16,000 $16,400 $400 $394,800 31/12/2017 $16,000 $16,400 $400 $395,200 30/06/2018 $16,000 $16,400 $400 $395,600 31/12/2018 $16,000 $16,400 $400 $396,000 30/06/2019 $16,000 $16,400 $400 $396,400 31/12/2019 $16,000 $16,400 $400 $396,800 *** 30/06/2020 $16,000 $16,400 $400 $397,200 31/12/2020 $16,000 $16,400 $400 $397,600 30/06/2021 $16,000 $16,400 $400 $398,000 31/12/2021 $16,000 $16,400 $400 $398,400 30/06/2022 $16,000 $16,400 $400 $398,800 31/12/2022 $16,000 $16,400 $400 $399,200 30/06/2023 $16,000 $16,400 $400 $399,600 31/12/2023 $16,000 $16,400 $400 $400,000 The Carrying Value of 6th Year is $ 396800 4 Bond Interest ($400000*8%*10) $320,000 Add Bond Discount $8,000 Total Cost of Borrowing $328,000

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