On January 1,2019,a company issued $400,000 of 10-year,12% bonds.The interest is payable semiannually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.The effective-interest method of amortization is used.
-What is the book value of the bond liability as of June 30,2019 (to the nearest dollar)?

Question

On January 1,2019,a company issued $400,000 of 10-year,12% bonds.The interest is payable semiannually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.The effective-interest method of amortization is used. 
-What is the book value of the bond liability as of June 30,2019 (to the nearest dollar)?

Quizplus · Accepted Answer

First, calculate the semi-annual interest payment:
$400,000 x 12% x 6/12 = $24,000
Next, calculate the semi-annual amortization using the effective-interest method:
Step 1: Interest expense based on the book value as of 1/1/2019:
$400,000 x 10% x 6/12 = $20,000
Step 2: Amortization of premium for the period:
$24,000 - $20,000 = $4,000
Step 3: New book value as of 6/30/2019:
$413,153 - $4,000 = $409,153
Therefore, the book value of the bond liability as of June 30, 2019 is $409,811 (rounded to the nearest dollar). The correct answer is D.

On January 1,2019,a Company Issued $400,000 of 10-Year,12% Bonds