On January 1 Sage Corporation issues $1000000 5-year 12% bonds at 95 with interest payable on January 1. The carrying value of the bonds at the end of the second interest period is:

Question

Quizplus · Accepted Answer

The carrying value of the bonds at the end of the first interest period will be $950,000 (95% of $1,000,000). 
The interest expense for the first year would be $120,000 ($1,000,000 x 12%), and the bond discount amortization for the first year would be $20,000 [(5% x $1,000,000) - $120,000]. 
Therefore, at the end of the first year, the carrying value of the bonds would be $950,000 + $20,000 = $970,000. 
For the second interest period, the interest expense would still be $120,000 (12% x $1,000,000), but the bond discount amortization would be slightly different. 
The bond discount at the beginning of the second year would be $50,000 ($1,000,000 face amount - $950,000 carrying value at the end of the first year). 
The bond discount amortization for the second year would be $25,000 [(5% x $1,000,000) - $120,000 - $50,000]. 
Therefore, the carrying value of the bonds at the end of the second interest period would be $970,000 + $25,000 = $995,000. 
However, the bonds were issued at a discount, so the carrying value at the end of the second interest period should be less than the face amount. 
The correct answer is therefore A) $970,000.

On January 1 Sage Corporation Issues $1000000 5-Year 12% Bonds