Bowlin Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2008, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Bowlin's fiscal year ends on December 31and the company uses the effective interest method of amortization. The book value of the bonds on December 31, 2008 is:

Question

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The book value of the bonds is calculated using the effective interest method. The initial book value is $937,790. Interest expense for the first period (July 1 to December 31) is $937,790 * 10% * (6/12) = $46,889.50. The cash interest payment is $1,000,000 * 9% * (6/12) = $45,000. The amortization of the discount is $46,889.50 - $45,000 = $1,889.50. Therefore, the book value on December 31, 2008, is $937,790 + $1,889.50 = $939,679.50.

Bowlin Company Issued $1,000,000 of 9 Percent, Ten-Year Bonds for $937,790