On January 1, Grogan Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The carrying value of the bonds at the end of the third interest period is:
A) $972,000
B) $976,000
C) $944,000
D) $928,000

Question

Quizplus · Accepted Answer

The face value of the bonds is $1,000,000 and they were sold at a discount of 4% (96% of face value), so the proceeds were $960,000 ($1,000,000 x 0.96). Since the bonds have a 12% coupon rate, the annual interest is $120,000 ($1,000,000 x 0.12).

The first interest payment of $60,000 ($120,000 ÷ 2) was made on July 1. The amount of interest expense recorded at the end of the first interest period (6 months) is $48,000 ($960,000 x 0.12 x 6/12). The carrying value of the bond at this point is $972,000 ($960,000 + $48,000 - $60,000).

The second interest payment of $60,000 was made on January 1 of year 2. The interest expense for the second interest period is $48,960 ($972,000 x 0.12 x 6/12). The carrying value of the bond at the end of the second interest period is $960,960 ($972,000 + $48,960 - $60,000).

The third interest payment of $60,000 was made on July 1 of year 2. The interest expense for the third interest period is $48,478.56 ($960,960 x 0.12 x 6/12). The carrying value of the bond at the end of the third interest period is $972,438.56 ($960,960 + $48,478.56 - $60,000).

Therefore, the answer is A) $972,000.

On January 1, Grogan Corporation Issues $1,000,000, 5-Year, 12% Bonds