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On January 1, Year 1, Weller Company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8%. Interest is paid annually on December 31.

-Assuming Weller issued the bonds for $431,940,what is the carrying value of the bonds on the December 31,Year 3?
A)$420,615
B)$426,495
C)$414,264
D)$404,800

Question

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

On January 1, Year 1, Weller Company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8%. Interest is paid annually on December 31.

-Assuming Weller issued the bonds for $431,940,what is the carrying value of the bonds on the December 31,Year 3?
A)$420,615
B)$426,495
C)$414,264
D)$404,800

Quizplus · Accepted Answer

Year 1 Interest expense = $431,940 × Market rate of 8% = $34,555
Annual interest payment = $400,000 × Stated rate of 10% = $40,000
Year 1 Amortization of premium = Interest payment of $40,000 - Interest expense of $34,555 = $5,445
Carrying value at end of Year 1 = Issue price of $431,940 - Amortization of premium of $5,445 = $426,495
Year 2 Interest expense = Carrying value at end of Year 1 of $426,495 × Market rate of 8% = $34,120
Year 2 Amortization of premium = Interest payment of $40,000 - Interest expense of $34,120 = $5,880
Carrying value at end of Year 2 = Carrying value at end of Year 1 of $426,495 - Amortization of premium of $5,880 = $420,615
Year 3 Interest expense = Carrying value at end of Year 2 of $420,615 × Market rate of 8% = $33,649
Year 3 Amortization of premium = $40,000 - $33,649 = $6,351 amortization in Year 3
Carrying value at end of Year 3 = Carrying value at end of Year 2 of $420,615 - Amortization of premium of $6,351 = $414,264

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