Kaleidoscope Paint
On January 1, 2019, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
-Refer to Kaleidoscope Paint. What is the carrying value of the bonds after the first interest payment is made on June 30, 2019?

Question

Quizplus · Accepted Answer

To determine the carrying value of the bonds after the first interest payment on June 30, 2019, we need to follow these steps:
1. Calculate the interest expense using the market rate (10%) and the carrying value of the bonds at the beginning of the period.
2. Calculate the actual cash paid for interest using the stated rate (9%) on the face value of the bonds.
3. Determine the amortization of the discount by subtracting the cash paid for interest from the interest expense.
4. Adjust the carrying value of the bonds by adding the amortization of the discount.
Let's go through these steps:
1. Interest Expense:
Interest expense = Carrying value of the bonds at the beginning * Market rate / 2
Interest expense = $480,745 * 10% / 2
Interest expense = $48,074.50 / 2
Interest expense = $24,037.25
2. Cash Paid for Interest:
Cash paid = Face value of the bonds * Stated rate / 2
Cash paid = $500,000 * 9% / 2
Cash paid = $45,000 / 2
Cash paid = $22,500
3. Amortization of the Discount:
Amortization of discount = Interest expense - Cash paid
Amortization of discount = $24,037.25 - $22,500
Amortization of discount = $1,537.25
4. Adjusted Carrying Value:
Adjusted carrying value = Beginning carrying value + Amortization of discount
Adjusted carrying value = $480,745 + $1,537.25
Adjusted carrying value = $482,282.25
After rounding to the nearest dollar, the carrying value of the bonds after the first interest payment on June 30, 2019, is $482,282.
Therefore, the correct answer is:
b. $482,282

Kaleidoscope Paint On January 1, 2019, This Company Issued $500,000, 10-Year, 9