On September 1, 2012, Howell Company purchased 600 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $625,000 (an 8% effective interest rate).The bonds, which mature on September 1, 2017, pay interest semiannually on March 1 and September 1.Assuming that Howell uses the effective interest method of amortization and that the bonds are appropriately classified as non-trading, the net carrying value of the bonds should be shown on Howell's December 31, 2012, statement of financial position at

Question

Quizplus · Accepted Answer

Using the effective interest method, the annual interest expense is calculated by multiplying the carrying value of the bonds at the beginning of the period by the effective interest rate of 8%. 
For the first interest period (September 1, 2012, to December 31, 2012), the interest expense would be:
$625,000 × 8% × (122/365) = $16,520
The bond discount amortization for the period would be:
$16,520 − $4,500 (9% × $600,000 face value × (122/365)) = $12,020
Therefore, the carrying value at December 31, 2012, would be:
$625,000 + $12,020 = $637,020
Dividing by 600 bonds gives a net carrying value per bond of $1,061.70, or a total net carrying value of $623,667. Therefore, the correct answer is C.

On September 1, 2012, Howell Company Purchased 600 of the $1,000