Asked by Fatima Zahra on May 04, 2024
Verified
On January 1 Sage Corporation issues $1000000 5-year 12% bonds at 95 with interest payable on January 1. The carrying value of the bonds at the end of the second interest period is:
A) $970000
B) $950000
C) $930000
D) $960000
Carrying Value
The recorded value of an asset in a company's financial statements, taking into account depreciation, amortization, and impairment costs.
Bonds
Debt securities issued by entities (such as corporations or governments) to raise capital, promising to pay back the principal amount along with interest.
Interest Payable
The amount of interest expense that has been incurred but not yet paid by a company, often reflected as a liability on the balance sheet.
- Attain proficiency in the calculation and consequences of bond premium and discount amortization.
- Determine the carrying value and interest expense related to bonds.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
A
Explanation :
The carrying value of the bonds at the end of the first interest period will be $950,000 (95% of $1,000,000).
The interest expense for the first year would be $120,000 ($1,000,000 x 12%), and the bond discount amortization for the first year would be $20,000 [(5% x $1,000,000) - $120,000].
Therefore, at the end of the first year, the carrying value of the bonds would be $950,000 + $20,000 = $970,000.
For the second interest period, the interest expense would still be $120,000 (12% x $1,000,000), but the bond discount amortization would be slightly different.
The bond discount at the beginning of the second year would be $50,000 ($1,000,000 face amount - $950,000 carrying value at the end of the first year).
The bond discount amortization for the second year would be $25,000 [(5% x $1,000,000) - $120,000 - $50,000].
Therefore, the carrying value of the bonds at the end of the second interest period would be $970,000 + $25,000 = $995,000.
However, the bonds were issued at a discount, so the carrying value at the end of the second interest period should be less than the face amount.
The correct answer is therefore A) $970,000.
The interest expense for the first year would be $120,000 ($1,000,000 x 12%), and the bond discount amortization for the first year would be $20,000 [(5% x $1,000,000) - $120,000].
Therefore, at the end of the first year, the carrying value of the bonds would be $950,000 + $20,000 = $970,000.
For the second interest period, the interest expense would still be $120,000 (12% x $1,000,000), but the bond discount amortization would be slightly different.
The bond discount at the beginning of the second year would be $50,000 ($1,000,000 face amount - $950,000 carrying value at the end of the first year).
The bond discount amortization for the second year would be $25,000 [(5% x $1,000,000) - $120,000 - $50,000].
Therefore, the carrying value of the bonds at the end of the second interest period would be $970,000 + $25,000 = $995,000.
However, the bonds were issued at a discount, so the carrying value at the end of the second interest period should be less than the face amount.
The correct answer is therefore A) $970,000.
Learning Objectives
- Attain proficiency in the calculation and consequences of bond premium and discount amortization.
- Determine the carrying value and interest expense related to bonds.