A company issues $20,000,000, 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 $19,604,144. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?
A) $19,612,642
B) $20,000,000
C) $19,625,124
D) $19,608,308

Question

Quizplus · Accepted Answer

The carrying value is calculated by adding the interest expense (based on the yield rate) to the initial carrying value and subtracting the actual interest paid. The initial carrying value is $19,604,144. The interest expense for the first period is $784,166 (8% of $19,604,144 / 2), and the interest paid is $780,000 (7.8% of $20,000,000 / 2). The new carrying value after the first period is $19,608,310. For the second period, the interest expense is $784,332 (8% of $19,608,310 / 2), and the interest paid is again $780,000. The new carrying value after the second period is approximately $19,612,642.

A Company Issues $20,000,000, 7