Final answer:
The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds Payable from Bonds Payable. Present value calculations are used to determine the current worth of a bond's future payments, adjusted for the market's current interest rate.
Step-by-step explanation:
The carrying amount of bonds issued at a discount is calculated by d) subtracting Discount on Bonds Payable from Bonds Payable. When a company issues bonds at a discount, the cash received is less than the face value (par value) of the bonds. Over the life of the bonds, this discount is amortized and the carrying value of the bonds increases until it reaches the face value upon maturity.
To understand how to calculate the present value of bonds, consider a simple two-year bond issued for $3,000 at an interest rate of 8%. The bond pays annual interest of $240 (which is 3,000 × 8%). If the discount rate is 8%, then the present value of these payments needs to be calculated using the present value formula. This process is repeated if interest rates rise and the new applicable discount rate is 11%.
The present discounted value of a bond represents the current worth of a future stream of payments, given a specific discount rate. This calculation is crucial when the bond's market interest rate is different from its coupon rate. If the market interest rate is higher than the coupon rate, the bond price will be less than the face value and vice versa.