A company issues a $1,000,000 bond at 98. The bond has a 5-year term. The company incurs $20,000 in debt issuance costs. What is the initial carrying amount of the bond liability?

Answer options:

$1,000,000

$980,000

$960,000

$980,000 Liability and $20,000 Asset

How to approach this question

Carrying Amount = Face - Discount - Issuance Costs. Or: Proceeds - Issuance Costs.

Full Answer

C.$960,000✓ Correct

Under ASU 2015-03, debt issuance costs are presented as a direct deduction from the carrying amount of the debt liability, similar to debt discounts. Initial Liability = ($1,000,000 × 0.98) - $20,000 = $960,000.

Common mistakes

Recording issuance costs as a deferred charge (asset).

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