On January 1,a company issued and sold a $400,000,7%,10-year bond payable,and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The carrying value of the bonds immediately after the second interest payment is:

Question

Quizplus · Accepted Answer

The discount on the bonds is $4,000 ($400,000 - $396,000). With the straight-line method, this discount is amortized evenly over the life of the bond. The bond has a 10-year term, and interest is paid semi-annually, resulting in 20 total interest payments. The discount amortized per period is $4,000 / 20 = $200. After two interest payments, $400 of the discount ($200 per payment) has been amortized. Therefore, the carrying value of the bonds immediately after the second interest payment is $396,000 (initial proceeds) + $400 (amortized discount) = $396,400.

On January 1,a Company Issued and Sold a $400,000,7%,10-Year Bond