On October 1, 2014, Renfro Company purchased to hold to maturity, 3,000, $1,000, 9% bonds for $2,970,000 which includes $45,000 accrued interest. The bonds, which mature on February 1, 2023, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2014 balance sheet at a carrying value of

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of bond discount. The discount is the difference between the face value of the bond and the purchase price.

Face value of 3,000 bonds = 3,000 x $1,000 = $3,000,000 
Purchase price = $2,970,000 
Discount = $3,000,000 - $2,970,000 = $30,000

Next, we need to amortize the discount over the life of the bond using the straight-line method.

Discount = $30,000 
Number of periods = 38 (19 years x 2 periods per year) 
Amortization per period = $30,000 / 38 = $789.47

As of December 31, 2014, the bond has been held for 3 months (October, November, December) and has received one semi-annual interest payment on August 1, 2014.

Accrued interest = $45,000 
Interest received = $3,000,000 x 9% x 6/12 = $135,000 
Total interest = $180,000 
Interest for 3 months = $180,000 x 3/12 = $45,000

The carrying value of the bond as of December 31, 2014 is calculated as follows:

Purchase price - Discount amortized to date + Accrued interest - Interest received = Carrying value

$2,970,000 - ($789.47 x 3) + $45,000 - $135,000 = $2,927,250

Therefore, the answer is B, the bonds should be reported in the December 31, 2014 balance sheet at a carrying value of $2,927,250.

On October 1, 2014, Renfro Company Purchased to Hold to Maturity