216. On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 95 with interest payable on July 1 and January 1. The carrying value of the bonds, using straight-line amortization, at the end of the third interest period is:

Question

Quizplus · Accepted Answer

The bonds were issued at a discount of 5% (100-95), or $50,000. This discount is amortized over the life of the bonds using the straight-line method, which means that $10,000 ($50,000/5 years) is amortized each year. 
At the end of the third interest period (which is 18 months or 1.5 years), two interest payments have been made and $15,000 of the discount has been amortized ($10,000 for the first year, $5,000 for the second year). 
Therefore, the carrying value of the bonds at the end of the third interest period is:
$1,000,000 (face value) - $35,000 (unamortized discount) = $965,000. 
Therefore, the correct answer is A) $965,000.