Question

on december 31, 2024, country living sales has 10year bonds payable of and discount on bonds payable of . how will this be shown on the december 31, 2024 balance sheet?

Answer 1

The value of bonds and discounts on bonds on the balance sheet reflects long-term liabilities, with present value calculations required when considering fluctuating interest rates. A bond's worth in the present decreases as market interest rates rise, affecting investment valuations and financial accounting.

Step-by-step explanation:

The question involves a two-year bond that was issued for $3,000 with an interest rate of 8%. Thus, the bond pays interest of $240 (8% of $3,000) each year. On a balance sheet, bonds payable and any discount on bonds payable are reported under long-term liabilities. The gauging of a bond's worth based on present value must factor in the discount rate.

To calculate present value, we employ the present value formula which discounts the future payments at the given discount rate. If the discount rate is the same as the coupon rate (which is 8% in this case), the bond's present value will be equal to its face value. However, if market interest rates increase (in this scenario, going from 8% to 11%), the present value will be less because the fixed interest payments are less appealing when compared to new bonds issued at higher rates.

For the given bond:

• Present value at an 8% discount rate would be: PV = $240/(1+0.08) + $3,240/(1+0.08)^2
• Present value at an 11% discount rate would be: PV = $240/(1+0.11) + $3,240/(1+0.11)^2

Knowing how bonds and their discounts are presented on a balance sheet and calculating their present value based on changing interest rates is fundamental to understanding financial accounting and investment valuations.

Answer 2

The correct option is c.

It accurately reflects both the Bonds Payable and the Discount on Bonds Payable on the December 31, 2024 Balance Sheet, following established accounting principles. Options A, B, and D contain errors in their calculations or interpretations of bond accounting.

The presentation of the 10-year Bonds Payable and the associated Discount on Bonds Payable on Country Living Sales' December 31, 2024 Balance Sheet should follow accounting principles.

Bonds Payable represent the face value of the bonds that the company has issued to raise capital. In this case, it's $598,000.

The Discount on Bonds Payable, on the other hand, is a contra-liability account, which means it is deducted from the Bonds Payable to calculate the carrying amount of the bonds.

A. Bonds Payable $590,000

• This option is incorrect because it does not account for the Discount on Bonds Payable. It only considers the face value of the bonds, which is $598,000.
• To accurately represent the liability, you need to consider both the face value and the discount.

B. Bonds Payable $598,000 plus Discount on Bonds Payable $5,350 for a carrying amount of $5,103,350

• This option is incorrect because it incorrectly adds the Discount on Bonds Payable to the face value of the bonds.
• The Discount on Bonds Payable should be deducted from the Bonds Payable to calculate the carrying amount, not added to it.

C. Bonds Payable $598,000 less Discount on Bonds Payable $5,350 for a carrying amount of $592,650

• This option is correct. It correctly deducts the Discount on Bonds Payable from the face value of the bonds to calculate the carrying amount, which is $592,650.
• This adheres to accounting principles and accurately represents the company's liability.

D. Bonds Payable $98,000 less one-month of $55,350 for a carrying amount of $897,465

• This option is incorrect for several reasons. First, it incorrectly calculates a loss of $98,000, which is not how bond accounting works.
• The discount on bonds is amortized over the life of the bonds, not recognized as a one-month loss.
• Second, the calculation of the carrying amount as $897,465 is not consistent with standard accounting practices and does not reflect the true liability.

The answer is Bonds Payable 598.000 less Discount on Bonds Payable 55,350 for a carrying amount of 592 650.

The complete question is here:

On December 31, 2024 Country Living Sales has 10-year Bonds Payable of 598.000 and Discount on Bonds Payable of $5.350. How will this be shown on the December 31, 2024 Balance Sheet?

A. Bonds Payable 590,000

B. Bonds Payable 598,000 plus Discount on Bonds Payable $5350 for a carrying amount of 5103 350

C. Bonds Payable 598.000 less Discount on Bonds Payable 55,350 for a carrying amount of 592 650

D. Bonds Payable $98.000 loss one-onth of 55,350 for a carrying amount of 897 465. Give complete answer in 200 to 300 words.