Asked by Martha Renteria on Jun 10, 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 second interest payment is:
A) $400,000.
B) $399,800.
C) $396,400.
D) $395,800.
E) $396,200.
Carrying Value
The net amount at which an asset is valued on the balance sheet, calculated as the original cost minus accumulated depreciation and impairments.
Bond Payable
A long-term liability where a borrower agrees to pay the bondholder the principal plus interest on a specified date.
Straight-Line Method
A method of calculating depreciation of an asset that evenly spreads the cost over its useful life.
- Absorb the intricacies and implications of bond pricing that entail discounts, premiums, and the selection of amortization methods.
Verified Answer
NB
Nayvelis BlancoJun 10, 2024
Final Answer :
C
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 life, with interest payments twice a year, resulting in 20 total interest payments. The discount amortized per period is $4,000 / 20 = $200. After two interest payments, $400 of the discount has been amortized ($200 per payment x 2 payments), so the carrying value is $396,000 (initial proceeds) + $400 (amortized discount) = $396,400.
Learning Objectives
- Absorb the intricacies and implications of bond pricing that entail discounts, premiums, and the selection of amortization methods.