On January 2, 2019, Kampai Sushi Bar sold $800,000 of bonds for $785,000. The bonds will mature in 10 years and pay interest annually on December 31. The company properly recorded the payment of interest and amortization of the discount using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of 2019?

Question

Quizplus · Accepted Answer

Here's why:
Kampai Sushi Bar sold the bonds at a discount, meaning they received less than the face value of the bonds. The face value is $800,000, but they sold the bonds for $785,000, which means the discount is $15,000 ($800,000 - $785,000).
When using the effective interest method to amortize the bond discount, the discount is gradually reduced over the life of the bond, and this reduction is added to the carrying value of the bond. The carrying value of the bond at issuance is the initial amount received, which is $785,000 in this case.
At the end of 2019, after the first interest payment and the first amortization of the discount, the carrying value of the bond will increase. This is because the amortization of the discount is added to the carrying value. Since the discount is being amortized (reduced), the unamortized discount is also decreasing.
Therefore, the carrying value of the bonds at the end of 2019 will be the original $785,000 plus the amortized portion of the discount for the year. Since the discount is being amortized, it will be less than the original $15,000, and the carrying value will be greater than $785,000. The unamortized premium option does not apply here because the bonds were sold at a discount, not a premium.

On January 2, 2019, Kampai Sushi Bar Sold $800,000 of Bonds