Lassen Corporation issued ten-year term bonds on January 1,2010,with a face value of $800,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $690,960 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.The carrying value of the bonds payable on the December 31,2010,balance sheet date should be (rounded to the nearest dollar)

Question

Quizplus · Accepted Answer

Using the effective interest method of amortization, the amount of interest expense for the first year (2010) can be calculated as follows:

Interest expense = Carrying value of bonds payable at the beginning of the period × Effective interest rate for the period
= $690,960 × 8% = $55,277.60

Since interest is payable semi-annually, half of this amount ($27,638.80) would be recorded as interest expense for the period ended June 30, 2010, and the other half would be recorded for the period ended December 31, 2010.

To calculate the carrying value of the bonds payable on the December 31, 2010, balance sheet date, we start with the initial carrying value of $690,960 and subtract the total amount of interest expense recorded for the year:

Carrying value on December 31, 2010 = Initial carrying value - Total interest expense
= $690,960 - $55,277.60
= $635,682.40

However, we also need to add the amount of amortization for the year. Since this is a 10-year bond, the total amount of amortization will be ($800,000 - $690,960) ÷ 10 = $10,404 per year. Again, this amount is split evenly between the two interest payment periods, so the amount of amortization for the period ended December 31, 2010, is $5,202.

Therefore, the carrying value of the bonds payable on the December 31, 2010, balance sheet date is:

Carrying value on December 31, 2010 = Initial carrying value - Total interest expense + Amortization for the period
= $690,960 - $55,277.60 + $5,202
= $640,884.40

Rounded to the nearest dollar, the answer is choice C ($698,382).

Lassen Corporation Issued Ten-Year Term Bonds on January 1,2010,with a Face