On October 1, 2017, Barrick Corp.purchased 800, $1,000, 9% bonds for $792,000, which included $12,000 accrued interest.The bonds, which mature on February 1, 2023, pay interest semi-annually on February 1 and August 1.The bonds will be held to maturity.Barrick uses the straight-line method of amortization.The bonds, which are accounted for under the amortized cost model, should be reported in the December 31, 2017 balance sheet at a carrying value of

Question

Quizplus · Accepted Answer

The bond purchase price of $792,000 (which includes accrued interest) is the initial carrying value of the bonds. The bonds have a remaining life of 5 years, or 10 semi-annual periods. The premium paid over the face value of $800,000 ($1,000 x 800) is equal to $792,000 - $800,000= ($8,000). The premium must be amortized over the remaining life of the bonds. Using the straight-line method, each period's amortization will be ($8,000 ÷ 10) = ($800). The interest payment received on February 1, 2018, is $800,000 x 9% x 6/12 = $36,000. The interest payment received on August 1, 2018, is also $36,000. Subtracting the interest payment from the amortization equals the reduction in the carrying value, which gives the carrying value for December 31, 2017. Therefore, the carrying value at December 31, 2017, will be:
Carrying value = Purchase price - amortization + semi-annual interest payment
($792,000 - $800) + ($36,000 - $800) = $780,600.