E3.12. Valuation of Bonds and the Accounting for Bonds, Borrowing Costs, and Bond Revaluations (Hard) On January 1, 2008, Debtor Corporation issued 10,000 five-year bonds with a face value of $1,000 and an annual coupon of 4 percent. Bonds of similar risk were yielding 8 percent p.a. in the market at the time.

a. What did the firm receive for each bond issued?

b. At the end of 2008, the market was still yielding 8 percent on the bonds. 1. What was the firm's borrowing cost before tax for 2008? 2. How much interest expense was reported in the income statement for 2008?

c. At the end of 2009, the yield on the bonds had dropped to 6 percent. 1. What was the firm's borrowing cost before tax for 2009? 2. How much interest expense was reported in the income statement for 2009?

d. Creditur Corporation purchased 2,000 of the bonds in the issue. FASB Statement No. 115 requires firms to mark these financial investments to market 1. What were the bonds carried at on the balance sheet at the end of 2009? 2. What was interest income in the income statement for 2009?