On January 2, 2016, Concrete Master Construction, Inc.issued $500,000, 10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.What is the carrying value of the bonds after the first interest payment is made on June 30, 2016?

Question

Quizplus · Accepted Answer

The carrying value of the bonds is the present value of the remaining future cash flows discounted at the market rate:
PV of remaining future cash flows = ($500,000 x 4.87757) + ($40,000 x 4.35526) = $2,438,785

After the first interest payment on June 30, 2016, the outstanding balance of the bond is $520,000 ($500,000 + $20,000 accrued interest). The interest expense for the second half of 2016 is $20,800 ($520,000 x 4%). The carrying value of the bonds as at December 31, 2016 is:

Carrying value = PV of remaining future cash flows + PV of interest payments
Carrying value = ($480,000 x 4.51939) + ($20,800 x 4.16986)
Carrying value = $2,157,529

Therefore, the correct answer is B.