Sage Company issued $600,000, 8%, 5-year bonds for 106, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

Question

Quizplus · Accepted Answer

The bond's face value is $600,000, and it was issued at 106%, meaning the company received $600,000 x 106% = $636,000 in cash. The bond has a 5-year term, and the interest is paid annually at a rate of 8% per year. Therefore, the annual interest payment is $600,000 x 8% = $48,000.

To amortize the bond, we need to calculate the total interest expense over the bond's term ($48,000 x 5 = $240,000) and the total premium paid ($636,000 - $600,000 = $36,000). We then divide the premium by the number of years to get the annual amortization ($36,000 ÷ 5 = $7,200).

After one year, the carrying value of the bond would be the face value minus the portion of the premium that has been amortized. The amount of premium amortization for the first year would be $7,200, so the carrying value of the bond after one year would be:

Carrying value = Face value - Premium amortization
Carrying value = $600,000 - $7,200
Carrying value = $592,800

Therefore, the best choice is C, $628,800, which is the carrying value of the bond after one year.

Sage Company Issued $600,000, 8%, 5-Year Bonds for 106, with Interest