On January 1,Year 1,Sheffield Co.issued bonds with a face value of $200,000,a term of ten years,and a stated interest rate of 6%.The bonds were issued at 105,and interest is payable each December 31.Sheffield uses the straight-line method to amortize bond discounts and premiums.What is the carrying value of the bonds at December 31,Year 4?

Question

Quizplus · Accepted Answer

Issue price = $200,000 × 105% = $210,000
Premium = Issue price of $210,000 - Face value of $200,000 = $10,000
Annual amortization of bond premium = Premium of $10,000 ÷ 10 years = $1,000
Amortization for years Year 1 through Year 4 = $1,000 × 4 years = $4,000
Unamortized premium at end of Year 4 = $10,000 ? $4,000 = $6,000
Carrying value on December 31,Year 4 = Face value of $200,000 + Unamortized premium of $6,000 = $206,000