On October 1, 2020, Barrick Corp. purchased 800, $ 1,000, 9% bonds for $ 792,000, which included $ 12,000 accrued interest. The bonds, which mature on February 1, 2029, pay interest semi-annually on February 1 and August 1. The bonds will be held to maturity. Barrick uses the straight-line method of amortization. The bonds, which are accounted for under the amortized cost model, should be reported in the December 31, 2020 balance sheet at a carrying value of

Question

Quizplus · Accepted Answer

The purchase price of the bonds was $792,000, which included $12,000 accrued interest. Therefore, the actual cost of the bonds was $780,000 ($792,000 - $12,000).

Since the bonds were purchased on October 1, 2020, there were 4 months until the end of the year, during which time 1/6 of the annual interest would have accrued. This amounts to $3,000 (800 bonds x $1,000 face value x 9% annual interest rate x 1/6).

Using the straight-line method of amortization, the amount of interest expense recognized for the 3 months from October 1 to December 31, 2020 would be $1,000 ($3,000 x 3/4).

Therefore, the carrying value of the bonds as of December 31, 2020 would be $780,600 ($780,000 + $1,000). Hence, the correct answer is option C.