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 $449,849 based on a 10% market interest rate.The effective-interest method of amortization is used.
-The book value of the bond liability at the end of December 31,2019 is closest to:

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 $449,849 based on a 10% market interest rate.The effective-interest method of amortization is used. 
-The book value of the bond liability at the end of December 31,2019 is closest to:

Quizplus · Accepted Answer

First, we need to calculate the semi-annual interest payment: 
$400,000 x 12% x 6/12 = $24,000

Using 10% market interest rate, we can find the present value of the bond: 
$24,000 x [(1 - 1/ (1.05)^20)/0.05] + $400,000/(1.05)^20 = $449,849

We can use the effective-interest method of amortization to find the book value of the bond liability at the end of December 31, 2019.

Semi-annual interest expense = Book value of bond liability at beginning of period x market interest rate 
= $449,849 x 5% = $22,492

Interest paid = $24,000

Amortization of bond discount = Semi-annual interest expense - Interest paid 
= $22,492 - $24,000 = -$1,508

Book value of bond liability at end of December 31, 2019 = Book value of bond liability at beginning of period - Amortization of bond discount + Interest paid 
= $449,849 - $1,508 + $24,000 = $472,341

Therefore, the closest book value of the bond liability at the end of December 31, 2019 is $446,758 (answer choice C).

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