On January 1, 2016, Sharpsburg, Inc.issued $400,000, 10-year, 10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.What is the carrying value of the bonds after the first interest payment is made on June 30, 2016?

Question

Quizplus · Accepted Answer

The carrying value of the bonds at issuance, using the market rate of 12%, would be calculated as follows: 
PV of principal = $400,000 / (1.12)^10 = $124,622.88 
PV of interest payments = ($400,000 x 0.10 x 6/12) / (1.12)^1 + ($400,000 x 0.10) / (1.12)^2 + ...+ ($400,000 x 0.10 x 6/12) / (1.12)^10 = $249,827.12 
Carrying value at issuance = $124,622.88 + $249,827.12 = $374,450

After the first interest payment is made on June 30, 2016, the carrying value of the bonds would be calculated as follows: 
Interest expense for the period = $400,000 x 0.10 x 6/12 = $20,000 
Interest paid = $400,000 x 0.10 x 6/12 = $20,000 
Amortization of discount = $20,550.88 ($374,450 - $354,200) 
Carrying value = $374,450 - $20,000 + $20,550.88 = $355,452