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

Question

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 ine 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

Solution.

Face value of bond is $400,000.

Issued at 98% that means bond issued at discount.

Discount amount is $400,000 x (1 - 0.98) = $8,000

Amortization of discount on every 6 month = $8,000/20 = $400

Q1.

Q2.

Q3.

Carrying value of bond at the end of 6th year would be $396,800.

Q4.

Q5.

Carrying value of bond on December 31,2013

Face value of bond is $400,000.

Issued at 98% that means bond issued at discount.

Discount amount is $400,000 x (1 - 0.98) = $8,000

Carrying value of bond = $400,000 - $8,000 = $392,000.

Date Account Title Debit Credit 31-Dec-13 Cash        392,000 Discount on bonds payable             8,000 Bond Payable           400,000 (Bond issue on discount)

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