On January 1,2013,Jacob issues $800,000 of 9%,13-year bonds at a price of 96½.Six years later,on January 1,2019,Jacob retires 20% of these bonds by buying them on the open market at 105½.All interest is accounted for and paid through December 31,2018,the day before the purchase.The straight-line method is used to amortize any bond discount or premium.What is the carrying value of the bond on January 1,2019?
A)$772,000
B)$831,076
C)$784,924
D)$277,000
E)$800,000

Question

Quizplus · Accepted Answer

The initial selling price of the bonds is $800,000 x 0.965 = $772,000 (since the price is given as 96½).
Since the bonds were issued for 13 years and 6 years have passed, the remaining life of the bond is 7 years.
The annual interest payment is $800,000 x 9% = $72,000.
Using the straight-line method of amortization, the bond discount is amortized at $3,000 per year ($28,000 bond discount divided by 7 years remaining).
As of January 1, 2019, the carrying value of the bond is:
Carrying value = Initial selling price - Accumulated amortization + Interest accrued and paid
Carrying value = $772,000 - ($3,000 x 6) + ($72,000 x 0.2)
Carrying value = $772,000 - $18,000 + $14,400
Carrying value = $784,400
However, Jacob retires 20% of the bonds, which is $800,000 x 0.2 = $160,000 worth of bonds.
At the time of retirement, the bonds were bought at 105½ which means for every $100 bond, Jacob paid $105.50.
Therefore, Jacob paid $160,000 x 1.055 = $168,800 to retire the bonds.
The carrying value of the remaining bonds is now:
Carrying value = $784,400 - $168,800 = $615,600
Thus, the correct answer is C) $784,924.

On January 1,2013,Jacob Issues $800,000 of 9%,13-Year Bonds at a Price