Greco Co.issued ten-year term bonds on January 1,20x5,with a face value of $1,600,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $1,381,920 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 31,20x5,balance sheet date should be

Question

Quizplus · Accepted Answer

Using effective interest method of amortization, we calculate the interest expense for the year as follows:

Interest expense = Carrying value of bonds payable at beginning of the year * Effective interest rate
= $1,381,920 * 8% 
= $110,554.40

The semi-annual interest payment is $1,600,000 * 6% * 1/2 = $48,000. Therefore, the amortization of bond discount during the year is $110,554.40 - $48,000 = $62,554.40.

The carrying value of the bonds payable on December 31, 20x5 is calculated as follows:

Carrying value of bonds payable at beginning of the year = $1,381,920
Add: Amortization of bond discount during the year = $62,554.40
Less: Semi-annual interest payment on June 30, 20x5 = $48,000
Carrying value of bonds payable on December 31, 20x5 = $1,396,474.40 ≈ $1,396,764 (rounded to nearest dollar)

Therefore, the correct answer is C.

Greco CoIssued Ten-Year Term Bonds on January 1,20x5,with a Face Value