Asked by Manar Altoblany on May 12, 2024
Verified
On January 1,a company issued and sold a $400,000,7%,10-year bond payable,and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The carrying value of the bonds immediately after the first interest payment is:
A) $400,000.
B) $399,800.
C) $400,200.
D) $395,800.
E) $396,200.
Carrying Value
The book value of assets and liabilities reported in the financial statements, considering depreciation or amortization.
Bond Payable
A long-term liability account that records the amounts owed to bondholders by the issuer.
Straight-Line Method
A technique for determining depreciation or amortization that involves uniformly distributing the cost of an asset throughout its lifespan.
- Gain an understanding of the mechanisms and impacts of bond pricing, specifically regarding discounts, premiums, and the employment of amortization strategies.
Verified Answer
UN
Ubaid Nasir PatelMay 13, 2024
Final Answer :
E
Explanation :
The discount on the bonds is $4,000 ($400,000 - $396,000). With the straight-line method, this discount is amortized evenly over the life of the bond. The bond has a 10-year term, and interest is paid semi-annually, resulting in 20 total interest payments. The discount amortized per period is $4,000 / 20 = $200. After the first interest payment, $200 of the discount has been amortized, increasing the carrying value of the bonds to $396,200 ($396,000 + $200).
Learning Objectives
- Gain an understanding of the mechanisms and impacts of bond pricing, specifically regarding discounts, premiums, and the employment of amortization strategies.