On November 1, 2014, Howell Company purchased 800 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $842,000, which includes accrued interest of $12,000. The bonds, which mature on January 1, 2019, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2014, balance sheet at

Question

Quizplus · Accepted Answer

To find the net carrying value of the bonds, we need to calculate the bond amortization and subtract it from the initial cost.

The total bond premium paid by Howell Company is:
$842,000 - $800,000 (face value of the bonds) = $42,000

The bond premium needs to be amortized over the term of the bonds using the straight-line method. The annual amortization is:

$42,000 / (5 years * 2) = $4,200

As the bonds were purchased on November 1, 2014, Howell Company owned the bonds for only 2 months, which is 1/6th of a year. Thus, the bond premium amortization for 2014 is:

$4,200 * 1/6 = $700

The net carrying value of the bonds on December 31, 2014 is:

Cost of bonds - Bond premium amortization = $842,000 - $700 = $841,300

However, the question states that the bonds are classified as available-for-sale, which means that we need to adjust the carrying value for any changes in fair value. The fair value of the bonds may have changed since the purchase date, but the question does not provide any information on this. Therefore, we assume that the fair value has not changed and the net carrying value of the bonds should be reported as $828,800 ($841,300 - $12,500 accrued interest income).

On November 1, 2014, Howell Company Purchased 800 of the $1,000