ExpertHard1 markMultiple Choice
CPA · Question 24 · Area 2: Select Accounts
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?
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?
Answer options:
A.
$957,876
B.
$950,349
C.
$965,349
D.
$967,876
How to approach this question
Effective Interest Method: Interest Expense = Carrying Value * Market Rate. Cash Paid = Face * Coupon Rate. Difference = Amortization. Add Amortization to CV (for discount bonds).
Full Answer
C.$965,349✓ Correct
C
Interest Expense ($57,473) exceeds Cash Paid ($50,000) by $7,473. This discount amortization is added to the carrying value.
Common mistakes
Subtracting amortization from CV (would be correct for Premium, but this is Discount).
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