Darren Company issued $8,000 of 8% bonds on January 1, 2017, at a discount of $940. The market rate of interest on the issue date was 10%. The carrying value of the bonds on December 31, 2017 is

Question

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The bond's face value is $8,000 and it was issued at a discount of $940, so the initial carrying value was $7,060 ($8,000 - $940). The market rate of interest on the issue date was 10%, while the bond's coupon rate is 8%. Since the market rate of interest is higher than the coupon rate, the bond was issued at a discount.

To calculate the carrying value of the bond on December 31, 2017, we need to determine the amount of interest expense for the year. The interest expense is calculated as follows:
($7,060 carrying value at beginning of year) x (10% market interest rate) = $706 interest expense for the year

Since the bond's coupon rate is 8%, the interest payment for the year is:
($8,000 face value) x (8% coupon rate) = $640 interest payment for the year

Therefore, the reduction in the carrying value of the bond for the year is:
$706 interest expense - $640 interest payment = $66 reduction in carrying value

Thus, the carrying value at the end of the year is:
$7,060 carrying value at beginning of year - $66 reduction in carrying value = $6,994 carrying value at end of year

Therefore, the answer is D ($7,126).

Darren Company Issued $8,000 of 8% Bonds on January 1