On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. What is the book value of the bond liability as of June 30, 2016 (to the nearest dollar)?
A)$400,000.
B)$416,495.
C)$409,811.
D)$403,342.

Question

Quizplus · Accepted Answer

Using the effective-interest method, the interest expense for the first six months is ($413,153 × 10% × 6/12) = $20,658. The bond liability at June 30, 2016 is therefore $400,000 + $20,658 - $31,153 ($413,153 × 10% × 6/12) = $389,505. 
Note that the premium of $13,153 ($413,153 - $400,000) is amortized over the life of the bond, and the effective-interest method results in a higher interest expense in the early years compared to straight-line amortization.

On January 1, 2016, a Company Issued $400,000 of 10-Year