Weller Company issued bonds with a face value of $280,000, a 9.50% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 7.50%. Interest is paid annually on December 31.Assuming Weller issued the bonds for $318,438, the carrying value of the bonds on the December 31, Year 3 balance sheet would be closest to:
A) $296,803.
B) $292,463.
C) $309,660.
D) $306,600.

Question

Quizplus · Accepted Answer

Step 1: Calculate the annual interest payment using the face value and stated rate of interest:
$280,000 x 9.50% = $26,600

Step 2: Calculate the present value of the bond using the market rate of interest:
N = 10 (10 years)
I/Y = 7.50% (market rate of interest)
PMT = $26,600 (annual interest payment)
FV = $280,000 (face value)
Solve for PV = $318,438 (issuance price)

Step 3: Determine the amortization of the bond discount for Year 1:
Interest expense = $318,438 x 7.50% = $23,883
Amortization of discount = $26,600 - $23,883 = $2,717
Carrying value = $318,438 - $2,717 = $315,721

Step 4: Determine the amortization of the bond discount for Year 2:
Interest expense = $315,721 x 7.50% = $23,679
Amortization of discount = $26,600 - $23,679 = $2,921
Carrying value = $315,721 - $2,921 = $312,800

Step 5: Determine the amortization of the bond discount for Year 3:
Interest expense = $312,800 x 7.50% = $23,460
Amortization of discount = $26,600 - $23,460 = $3,140
Carrying value = $312,800 - $3,140 = $309,660

Therefore, the closest answer choice is C) $309,660.

Weller Company Issued Bonds with a Face Value of $280,000