The Amazing Widget Company issues $500 000 of 6%, 10- year debentures at 103 on 31 March 2014. The debenture pays interest on 31 March and 30 September. The market rate of interest on the issue date was 4%. Assume the company uses the straight- line method for amortisation. What net balance will be reported for the debentures on the balance sheet on 30 September 2014?
A)$500 000
B)$515 250
C)$514 250
D)$515 000

Question

Quizplus · Accepted Answer

The correct answer is C. The net balance will be $514,250 on the balance sheet on 30 September 2014.The debentures were issued at a premium of $15,000 ($500,000 x 103% - $500,000). This premium is amortized over the life of the debentures using the straight-line method. The annual amortization is $1,500 ($15,000 / 10 years).The net balance of the debentures on the balance sheet on 30 September 2014 is $514,250. This is calculated as follows:Debenture face value: $500,000Less: Unamortized premium: $14,250 ($15,000 - $750)Net balance: $514,250

The Amazing Widget Company Issues $500 000 of 6%, 10-