Lassen Corporation issued ten-year term bonds on January 1, 2010, with a face value of $800,000. The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used. The carrying value of the bonds payable on the December 31, 2010, balance sheet date should be

Question

Quizplus · Accepted Answer

First, we need to calculate the semi-annual interest payment:
$800,000 x 6% x 6/12 = $24,000

Using the effective interest rate method, we first need to calculate the interest expense for the first period:
Carrying value = $690,960
Interest expense = $690,960 x 8% = $55,277

This leaves us with $30,723 ($24,000 - $55,277) to apply towards reducing the carrying value of the bond.

The carrying value on June 30, 2010, would then be:
$690,960 + $30,723 = $721,683

We repeat the process for the second period:
Carrying value = $721,683
Interest expense = $721,683 x 8% = $57,735

This leaves us with $22,265 ($24,000 - $57,735) to apply towards reducing the carrying value of the bond.

The carrying value on December 31, 2010, would then be:
$721,683 - $22,265 = $698,418

Therefore, the correct answer is C) $698,382.

Lassen Corporation Issued Ten-Year Term Bonds on January 1, 2010