On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, what is the book value of the bond liability as of June 30, 2014 (to the nearest dollar)?

Question

Quizplus · Accepted Answer

Step 1: Calculate the semi-annual interest payment: 
10% x $400,000 x 1/2= $20,000 
Step 2: Calculate the amortization of bond premium for the first interest payment: 
Effective interest expense: $413,153 x 5% = $20,658 
Amortization of bond premium: $20,658 - $20,000 = $658 
Step 3: Calculate the carrying value of the bond liability on June 30, 2014: 
Carrying value = Face value of the bond liability + Unamortized bond premium 
Carrying value = $400,000 + $658 = $400,658 
Therefore, the best answer is C)$409,811.

On January 1, 2014, a Corporation Issued $400,000 of 10-Year