On January 1, 2008, Roughback Corporation issued $5 million of 10-year bonds and paid $30,000 in external bond issue costs and $10,000 in salary expense associated with bond issue. The bonds pay a 9% interest coupon annually on December 31 and are callable at 103% of face value. The bonds were issued to yield 10% annually.

1. What is the carrying value of the bond at the date of issuance under US GAAP?

2. If Huston issued the bonds under IFRS reporting rules, what is the interest rate used to calculate interest expense? Round to 2 decimal places.

3. How will Huston’s 2008 earnings be affected by the bond issue? Note the relevant account(s) and amount(s). If you want to use journal entries to organize your work, that’s fine. But if you do, be sure that you at least circle the relevant earnings-related items.

4. On January 1, 2011, Huston decides to retire the debt early. If Huston repurchases the entire issue at the fixed call price what gain or loss will Huston recognize? Be sure to provide both the amount and the direction of the effect (whether it’s a gain or loss). Again, starting with a journal entry is fine, but I’m not asking you for journal entries.

I’m asking you for the earnings effect.