Final answer:
The correct answer is option a. The carrying amount of the bonds is calculated by subtracting the Discount on Bonds Payable from the Bonds Payable, resulting in $828,000. This represents the net carrying value of the bonds on the balance sheet. A variation in discount rates affects the present value of future bond payments, demonstrating how market conditions can alter bond valuations.
Step-by-step explanation:
To determine the carrying amount of the bonds, you subtract the balance of the Discount on Bonds Payable account from the balance of the Bonds Payable account. Here's the calculation:
Bonds Payable: $900,000
Discount on Bonds Payable: $72,000
Carrying Amount: Bonds Payable - Discount on Bonds Payable = $900,000 - $72,000 = $828,000.
Therefore, the correct answer is $828,000, which represents the net carrying value of the bonds on the company's balance sheet.
Let's look at an example to understand this concept further. Consider a simple two-year bond with a principal amount of $3,000 and an interest rate of 8%. Using a discount rate of 8%, the present value of the interest payments ($240 each year) and the principal ($3,000) to be received in the future can be calculated using the present value formula. If the discount rate rises to 11%, these future cash flows' present value would decrease, indicating a change in the bond's carrying amount if such market conditions were to be recognized on the balance sheet.