Q: What mistakes do candidates make on this CPA question?

Subtracting amortization (treating it like a premium). Using the stated rate for interest expense.

Question 1

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.
What is the carrying amount of the bonds at December 31, Year 1 (after the first interest payment)?

Accepted Answer

Effective Interest Method:
1. Interest Exp = Beg CV * Market Rate.
2. Cash Paid = Face * Stated Rate.
3. Amortization = Difference.
4. End CV = Beg CV + Amortization (for discount) OR - Amortization (for premium).
Here, CV ($92k) < Face ($100k), so it's a discount. Add amortization.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Subtracting amortization (treating it like a premium). Using the stated rate for interest expense.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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