Question

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, what will be the approximate carrying value of the bonds on Dec 31, 2020 balance sheet?

a. $14, 709, 481.
b. $15,000,000.
c. $14, 718, 844.
d. $14, 706, 232.

Answer 1

Using effective-interest amortization, the approximate carrying value of the bonds on Dec 31, 2020 balance sheet is:

a. $14, 709, 481.

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds = $15,000,000

Bonds price = 14,703,108

Bonds discount = $296,892

Coupon interest rate = 7.8%

Effective interest rate = 8%

Interest payments on June 30 and December 31

June 30, 2020:

Interest expense = $588,124 ($14,703,108 * 4%)

Cash payment = $585,000 ($15,000,000 * 3.9%)

Amortization of discount = $3,124 ($588,124 - $585,000)

Bonds payable = $14,706,232 ($14,703,108 + $3,124)

December 31, 2020:

Interest expense = $588,249 ($14,706,232 * 4%)

Cash payment = $585,000 ($15,000,000 * 3.9%)

Amortization of discount = $3,249 ($588,249 - $585,000)

Bonds payable = $14,709,481 ($14,706,232 + $3,249)