Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31.Assuming Wayne issued the bonds for 102½, the carrying value of the bonds on the December 31, Year 1 balance sheet would be:
A) $601,500.
B) $613,500.
C) $615,000.
D) $616,500.

Question

Quizplus · Accepted Answer

The bonds were issued for 102½, which means the company received 102.5% of the face value or $615,000 (600,000 x 1.025).

To calculate the annual amortization amount, we first need to calculate the total interest expense over the life of the bond:

$600,000 x 6% x 10 = $360,000

The annual amortization amount would be $36,000 ($360,000 / 10).

On December 31, Year 1, one year of interest has accrued, so the carrying value of the bond would be:

Carrying value = Face value - Accumulated amortization 
Carrying value = $615,000 - $36,000 
Carrying value = $579,000

However, since interest is paid annually on December 31, the company would also need to record the interest expense for the year:

Interest expense = Carrying value x Stated interest rate 
Interest expense = $579,000 x 6% 
Interest expense = $34,740

The carrying value on the balance sheet would therefore be:

Carrying value = Carrying value from above + Interest expense 
Carrying value = $579,000 + $34,740 
Carrying value = $613,740

Rounded to the nearest thousand, the carrying value on the December 31, Year 1 balance sheet would be $613,500. Therefore, the best choice is B.

Wayne Company Issued Bonds with a Face Value of $600,000