Question 1

On Jan 1, Year 1, a company issued $1,000,000, 5% bonds due in 5 years. The bonds were sold to yield 6%. Interest is paid annually on Dec 31. The PV of the bonds is $957,876. What is the carrying value of the bonds at Dec 31, Year 1?

Accepted Answer

Effective Interest Method: Interest Expense = Carrying Value * Market Rate. Cash Paid = Face * Coupon Rate. Difference = Amortization. Add Amortization to CV (for discount bonds).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Subtracting amortization from CV (would be correct for Premium, but this is Discount).

On Jan 1, Year 1, a company issued $1,000,000, 5% bonds due in 5 years. The bonds were sold to yield 6%. Interest is paid annually on Dec 31. The PV of the bonds is $957,876. What is the carrying value of the bonds at Dec 31, Year 1?

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