ExpertMedium1 markMultiple Choice
CPA · Question 31 · Area II: Balance Sheet Accounts
On Jan 1, Year 1, a company issued $1,000,000 of 5% bonds at a price to yield 6%. The bonds were issued at $957,000. Interest is paid annually on Dec 31. What is the carrying value of the bonds at Dec 31, Year 1?
On Jan 1, Year 1, a company issued $1,000,000 of 5% bonds at a price to yield 6%. The bonds were issued at $957,000. Interest is paid annually on Dec 31. What is the carrying value of the bonds at Dec 31, Year 1?
Answer options:
A.
$957,000
B.
$964,420
C.
$949,580
D.
$1,000,000
How to approach this question
Effective Interest Method: 1. Calculate Interest Expense (Carrying Value * Market Rate). 2. Calculate Cash Paid (Face Value * Coupon Rate). 3. Difference is Amortization. 4. Add Amortization to Carrying Value (for discount).
Full Answer
B.$964,420✓ Correct
B
Interest Expense = $957,000 * 0.06 = $57,420.<br/>Cash Payment = $1,000,000 * 0.05 = $50,000.<br/>Discount Amortization = $57,420 - $50,000 = $7,420.<br/>Ending Carrying Value = $957,000 + $7,420 = $964,420.
Common mistakes
Using coupon rate for expense; subtracting amortization for a discount.
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