The carrying amount of the bonds remains at their face value of $1,000,000 at the end of the sixth year as the discount of $20,000 was fully amortized over the bond's life.
To determine the carrying amount of the bonds after six years, let's first calculate the annual amortization of the discount on these bonds.
The bonds were sold at 98, which means they were sold at a discount. The discount is the difference between the face value and the selling price.
Face value of the bonds = $1,000,000
Selling price = 98% of face value = $1,000,000 * 98% = $980,000
Discount = Face value - Selling price = $1,000,000 - $980,000 = $20,000
The bonds have a 5% coupon rate, but we're not provided information about whether the interest is paid annually or semi-annually. Assuming it's paid annually, the annual interest payment would be 5% of the face value, which is $1,000,000 * 5% = $50,000.
To find the annual amortization of the discount, we subtract the interest payment from the annual cash paid to bondholders:
Annual cash paid to bondholders = $50,000
Interest expense on the income statement = $50,000
Amortization of the discount = Interest expense - Cash paid = $50,000 - $50,000 = $0
Therefore, after six years, the carrying amount of the bonds would still be their face value of $1,000,000, as there is no amortization of the discount given that the cash paid equals the interest expense, meaning the discount is fully amortized or accounted for over the bond's life.
complete the question
Joseph Max, Incorporated, sold 10-year, 5 percent bonds for $1,000,000 at 98. Determine the carrying amount of the bonds, including their face value and unamortized discount, at the end of the sixth year the bonds were outstanding.