Use the following information for the following 3 questions: (round all parts to
ID: 2391599 • Letter: U
Question
Use the following information for the following 3 questions: (round all parts to the nearest dollar) Porter, Inc. issued $400,000, 10-year, 10% bonds for $354,200 on January 1, 2017, the bonds pay interest semiannually on June 30 and December 31. On the date of issuance, the interest rate in the bond market is 12%. Round all parts of the problem to the nearest dollar. 1. What will Porter record as interest expense for the year ending December 31,2017? A. S42,579 B. S40,000 C. S21,252 D. $21,327 E. S20,000 2. What is the carrying value of the bond on December 31, 2017? A. S354,200 B. $355,452 C. $356,779 D. S400,000 E. $359,677 3. What is the total cost of borrowing over the life of this bond? A. S45,800 B. $354,200 C. $400,000 D. S445,800 E. S800,000Explanation / Answer
1. Answer: Option A. $42,579
Interest expense for the year ending December 31, 2017 = $21252 + $21327 = $42579
2. Answer: Option C. $356,779
See column G of the table below.
3. Answer: Option D. $445,800
Total cost of borrowing over the life of the bond is the difference between the cash paid out over the life of the bond and the cash received on issuance of the bond.
Cash paid out = Face value of bond + Interest = $400000 + ($400000 x 10% x 10 years) = $400000 + $400000 = $800000
Cash received on issuance of bond = $354200
Total cost of borrowing = $800000 - $354200 = $445800
A B C D = C - B E F G = F - E Date Interest Payment(Stated Rate 10% x 6/12) Interest Expense
(Effective Rate 12% x 6/12) Amortization Debit Balance in Bond Discount Credit Balance in Bonds Payable Book value of Bonds Jan. 1, 2017 45800 400000 354200 Jun. 30, 2017 20000 21252 1252 44548 400000 355452 Dec. 31, 2017 20000 21327 1327 43221 400000 356779