Presented here is a partial amortization schedule for Roseland Company which sold $300,000 of 5-year, 10% bonds on January 1, 2020, for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (v)?

Question

Presented here is a partial amortization schedule for Roseland Company which sold $300,000 of 5-year, 10% bonds on January 1, 2020, for $312,000 and uses annual straight-line amortization.  Which of the following amounts should be shown in cell (v)?

Quizplus · Accepted Answer

The amortization schedule shows that each year, $2,400 of the bond discount is being amortized ($12,000 total discount divided by 5 years). This means that at the end of year 2 (December 31, 2021), $4,800 of the bond discount will have been amortized ($2,400 * 2 years). So, the carrying value of the bond on December 31, 2021 will be $307,200 ($312,000 bond issue price minus $4,800 of amortized bond discount). To calculate the amount of interest expense for year 3, we multiply the carrying value by the bond interest rate of 10%:
$307,200 x 0.10 = $30,720
Therefore, $30,720 is the amount that should be shown in cell (v) for year 3. To check our answer, we can add this amount to the amount of bond discount being amortized for year 3 ($2,400) to get the total interest expense for year 3:
$30,720 + $2,400 = $33,120, which matches the amount shown in the amortization schedule. Out of the answer choices, C is the closest to $30,720.

Presented Here Is a Partial Amortization Schedule for Roseland Company