Table 16-4
Parson Products Inc. purchased $186,000, 10%, five-year bonds to hold until maturity. The bonds were purchased on July 1, 2017 at market value which was 103, and will mature on July 1, 2022. Interest payment dates are June 30 and December 31. Parson uses the straight-line method to amortize any bond discount or premium.
-Refer to Table 16-4.Assume that Parson Products Inc.fails to make the necessary six-month amortization entry on December 31,2017.What is the effect of that error on the December 31,2017,financial statements?

Question

Quizplus · Accepted Answer

Failing to make the necessary six-month amortization entry would result in Interest Revenue being overstated and Investment in Bonds being understated. The amount of the error can be calculated by dividing the bond discount by ten (the number of periods) and multiplying it by the number of periods that have passed since the purchase. In this case, the bond discount is $6,000 ($186,000 - $180,000), and six months have passed since the purchase, so the error would be $558 ($6,000/10*1). Therefore, the correct choice is C, as the error would overstate Interest Revenue by $558.

Table 16-4 Parson Products Inc. Purchased $186,000, 10%, Five-Year Bonds to Hold