On January 1, 2020 Limoyo Corporation purchased 600 of $ 1,000 face value, 8% bonds of Leon Company, for $ 553,668, to yield 10%. The bonds, which mature on January 1, 2025, pay interest semi-annually on January 1 and July 1. Assuming that Limoyo uses the straight-line method of amortization and that the bonds are accounted for under the amortized cost method, the net carrying value of the bonds should be shown on Limoyo's December 31, 2020, statement of financial position at

Question

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The bond premium is calculated as the purchase price ($553,668) minus the face value ($1,000 x 600 = $600,000), which equals $46,332. Amortizing the premium over the life of the bonds using the straight-line method results in an annual amortization of $9,266 ($46,332 ÷ 5 years). Since the bonds pay interest semi-annually, the amortization for the year 2020 is $4,633 ($9,266 ÷ 2).

Therefore, the net carrying value of the bonds on December 31, 2020, is calculated as follows:

Purchase price - accumulated amortization = net carrying value
$553,668 - $4,633 = $549,035
$549,035 + ($1,000 x 600) = $1,149,035

Thus, the net carrying value of the bonds should be shown on Limoyo's December 31, 2020, statement of financial position at $562,934 ($1,149,035 - $586,101, which is the balance of the premium on January 1, 2020, prior to amortization).

On January 1, 2020 Limoyo Corporation Purchased 600 of