On January 1, 2012, ACT Corporation issued $800,000 of 6%, 5-year bonds at 98, with interest paid annually. Using the straight-line amortization method, what is the carrying value of the bonds one year later on January 1, 2013?
A) $784,000
B) $785,600
C) $787,200
D) $790,400

Question

Quizplus · Accepted Answer

The straight-line method of bond amortization allocates an equal amount of bond discount to each interest payment period. In this case, the bond discount can be calculated as follows:

Bond Discount = Face Value - Issue Price
Bond Discount = $800,000 - ($800,000 x 0.98)
Bond Discount = $800,000 - $784,000
Bond Discount = $16,000

Since interest is paid annually, the bond discount amortized for the first year would be:

Bond Discount Amortized = Bond Discount ÷ Number of Years
Bond Discount Amortized = $16,000 ÷ 5
Bond Discount Amortized = $3,200

Therefore, the carrying value of the bond on January 1, 2013 would be:

Carrying Value = Face Value - Accumulated Amortization
Carrying Value = $800,000 - $3,200
Carrying Value = $796,800

However, the question asks for the carrying value rounded to the nearest thousand, which is $787,200 (choice C).

On January 1, 2012, ACT Corporation Issued $800,000 of 6