A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?
A) $9,806,321
B) $10,000,000
C) $9,812,563
D) $9,804,155

Question

Quizplus · Accepted Answer

The carrying value of the bonds increases by the amortization of the discount. The interest expense is calculated using the effective interest rate (8%) on the carrying amount, and the cash interest paid is based on the coupon rate (7.8%). The difference is the amortization of the discount. After two periods, the carrying value is $9,806,321.

A Company Issues $10,000,000, 7