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On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.

-What is the carrying value of the bond liability at December 31,Year 3?
A)$241,000
B)$242,500
C)$237,500
D)$245,000

Question

[The following information applies to the questions displayed below.]

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.

-What is the carrying value of the bond liability at December 31,Year 3?
A)$241,000
B)$242,500
C)$237,500
D)$245,000

Quizplus · Accepted Answer

Proceeds from issuance = Face value of $250,000 × 95% = $237,500
Discount = Face value of $250,000 -Proceeds of $237,500 = $12,500
Annual amortization = Discount of $12,500 ÷ 5 years = $2,500
Unamortized discount at December 31,Year 3 = $12,500 - ($2,500 × 3)= $5,000
Carrying value at December 31,Year 3 = Bonds payable of $250,000 - Unamortized discount of $5,000 = $245,000

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