Pueblo Company issued $362,000 of 5-year, 6% bonds at 97 on January 1, 2014. The

Question

Pueblo Company issued $362,000 of 5-year, 6% bonds at 97 on January 1, 2014. The bonds pay interest twice a year.

(a) (1) Prepare the journal entry to record the issuance of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(2) Compute the total cost of borrowing for these bonds.

(b) (1) Prepare the journal entry to record the issuance of the bonds, assuming the bonds were issued at 104. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(2) Compute the total cost of borrowing for these bonds, assuming the bonds were issued at 104.

Explanation / Answer

1) Prepare the journal entry to record the issuance of the bonds. (List multiple debit/credit entries in order of magnitude.)

Debit: Cash $486,668 ($496,600 x 0.98)
Debit: Bonds discount $9,932
Credit: Bonds payable $496,600 (always face value)

2) Compute the total cost of borrowing for these bonds. (Round computations and answer to 0 decimal places.)

Over the 5 yrs, the interest paid in cash = $496,600 x 8% x 5 = $198,640. Add to that the bonds discount amount since that will be amortised to interest over the 5 yrs, and the total cost of borrowing is $208,572.
The other way to work this out is this: The total to be paid out over the 5yrs is the 5 yrs' interest plus the face value, $198,640 + $496,600 = $695,240. The total received was $486,668. The difference is your total cost of borrowing $208,572.

1) Prepare the journal entry to record the issuance of the bonds, assuming the bonds were issued at 104. (List multiple debit/credit entries in order of magnitude.)

Debit: Cash $516,464
Credit: Bonds payable $496,600 (always face value)
Credit: Bonds premium $19,864 ($496,600 x 1.04)

2) Compute the total cost of borrowing for these bonds. (Round computations and answer to 0 decimal places.)

Over the 5 yrs, the interest paid in cash = $496,600 x 8% x 5 = $198,640. Deduct the bonds premium amount since that will be amortised to interest over the 5 yrs, and the total cost of borrowing is $178,776.
The other way to work this out is this: The total to be paid out over the 5yrs is the 5 yrs' interest plus the face value, $198,640 + $496,600 = $695,240. The total received was $516,464. The difference is your total cost of borrowing $178,776.

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