On January 1,2017,Sharpsburg,Inc.issued $400,000,ten-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 30,2017?

Question

Quizplus · Accepted Answer

The carrying value of the bonds on January 1, 2017 was $354,200, which is the amount the bonds were issued for. 
For the first interest payment on June 30, 2017, the company would have accrued 6 months of interest expense, which is calculated using the effective interest rate:
Effective Interest Rate = (1 - (1 + Market Rate)^-n) / (Market Rate) = (1 - (1 + 0.12)^-10) / 0.12 = 5.6502
Interest Expense = Carrying Value * Effective Interest Rate * Time = $354,200 * 0.12 * 6/12 = $21,252
The company would have made an interest payment of $20,000 on June 30, 2017. Therefore, the carrying value of the bonds after the first interest payment is:
Carrying Value = Prior Carrying Value + Interest Expense - Interest Payment = $354,200 + $21,252 - $20,000 = $355,452
So, the best choice is C, $355,452.