On January 1, 2013, $1,000,000, 5-year, 5% bonds, were issued for $957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. What would be the amortized cost of the bonds on January 1, 2014?
A) $1,000,000
B) $957,345
C) $961,069
D) $961,845

Question

Quizplus · Accepted Answer

The amortized cost of the bonds on January 1, 2014, would be $961,069. This is calculated by adding the interest expense (using the market rate of 6% per annum, applied semi-annually to the carrying amount) to the carrying amount of the bonds, and then subtracting the interest payment (using the coupon rate of 5% per annum, applied semi-annually on the face value of the bonds). The interest expense for the first year is higher than the interest payment due to the effective interest method of amortization, causing the carrying amount of the bonds to increase.

On January 1, 2013, $1,000,000, 5-Year, 5% Bonds, Were Issued