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

Face value of the bonds = $400000 Issue price of the bonds = 4000*$98 = $392000 Discount on issue of bonds = $8000 (400000-392000) Amortization per annum = $8000/10 = $800 Semi-annual interest of the bonds = $400000*8%*6/12 = $16000 Date Account Head & Description Debit Amount Credit Amount 1) Dec 31, 2013 Cash 392000 Discount on issue of bonds 8000 8% 10 year bonds 400000 (to record the issue of the bonds) 2) Jun 30, 2014 Interest expense (8000+800) 8800 Discount on issue of bonds 800 Cash 8000 (to record the interest payment) 3) Carrying value of the bonds at the end of 6th year = $400000-(800*(10-6)) = $396800 4) Total borrowing costs = Total interest + Discount on issue of bonds = (8000*10)+(800*10) = $88000 4) Carrying value of the bonds on Dec 31 2013 = $400000-(800*(10-0)) = $392000

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