ExpertMedium1 markMultiple Choice
CPA · Question 31 · Area II: Balance Sheet Accounts
On January 1, Year 1, Bond Co. issued 5-year bonds with a face value of $100,000 and a stated rate of 8% payable annually. The bonds were issued to yield 10%. The present value of the bonds is $92,418. <br/>What is the carrying amount of the bonds at December 31, Year 1 (after the first interest payment)?
On January 1, Year 1, Bond Co. issued 5-year bonds with a face value of $100,000 and a stated rate of 8% payable annually. The bonds were issued to yield 10%. The present value of the bonds is $92,418. <br/>What is the carrying amount of the bonds at December 31, Year 1 (after the first interest payment)?
Answer options:
A.
$92,418
B.
$91,176
C.
$93,660
D.
$94,418
How to approach this question
Effective Interest Method: <br/>1. Interest Exp = Beg CV * Market Rate. <br/>2. Cash Paid = Face * Stated Rate. <br/>3. Amortization = Difference. <br/>4. End CV = Beg CV + Amortization (for discount) OR - Amortization (for premium). <br/>Here, CV ($92k) < Face ($100k), so it's a discount. Add amortization.
Full Answer
C.$93,660✓ Correct
C
1. Interest Expense = $92,418 × 10% = $9,242.<br/>2. Cash Payment = $100,000 × 8% = $8,000.<br/>3. Discount Amortization = $9,242 - $8,000 = $1,242.<br/>4. Ending Carrying Amount = $92,418 + $1,242 = $93,660.
Common mistakes
Subtracting amortization (treating it like a premium). Using the stated rate for interest expense.
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