Blanding Company issues $1 000 000 of 8%, 10- year debentures at 98 on 28 February 2014. The debenture pays interest on 28 February and 31 August. The market rate of interest on the issue date was 10%. Assume Blanding uses the straight- line method for amortisation. What net balance will be reported for the debentures on the balance sheet on 31 August 2014?
A)$1 000 000
B)$979 000
C)$980 000
D)$981 000

Question

Quizplus · Accepted Answer

The debentures were issued at 98, meaning they were issued at a discount of 2% (or $20,000). Using the straight-line method, the discount is amortized evenly over the 10-year period. By 31 August 2014, 6 months of amortization would have occurred, reducing the discount by $1,000 ($20,000 / 10 years / 2 periods per year). Therefore, the net balance is $980,000 ($1,000,000 - $20,000 + $1,000).

Blanding Company Issues $1 000 000 of 8%, 10- Year