On January 1, 2010, Solis Co.issued its 10% bonds in the face amount of $3,000,000, which mature on January 1, 2020.The bonds were issued for $3,405,000 to yield 8%, resulting in bond premium of $405,000.Solis uses the effective-interest method of amortizing bond premium.Interest is payable annually on December 31.At December 31, 2010, the carrying value of the bonds should be

Question

Quizplus · Accepted Answer

Using the effective-interest method, we first calculate the interest expense for the first year:
Interest expense = carrying value x effective interest rate
Effective interest rate = yield rate - bond premium amortized in the period
Effective interest rate = 8% - ($405,000 / 10)%
Effective interest rate = 8% - 4.5%
Effective interest rate = 3.5%
Interest expense = $3,405,000 x 3.5%
Interest expense = $119,175

The bond premium amortized in the first year is:
Bond premium amortized = bond premium / number of interest periods
Bond premium amortized = $405,000 / 10
Bond premium amortized = $40,500

Therefore, the carrying value of the bonds at December 31, 2010 is:
Carrying value = face amount of bonds - unamortized bond premium + unamortized bond discount
Unamortized bond premium = bond premium - bond premium amortized in the period
Unamortized bond premium = $405,000 - $40,500
Unamortized bond premium = $364,500
Carrying value = $3,000,000 - $364,500 + 0
Carrying value = $2,635,500
However, since interest is payable on December 31, the carrying value must be increased by the interest expense incurred but not yet paid:
Carrying value = $2,635,500 + $119,175
Carrying value = $3,377,675
Rounded to the nearest thousand, the carrying value is $3,377,400. Therefore, the correct answer is B.