Mc Andrews Corporation issued $200,000 of 6.0% 10-year bonds. The bonds are date

Question

Mc Andrews Corporation issued $200,000 of 6.0% 10-year bonds. The bonds are dated and sold on January 1, 2015 interest payment dates are January 1 and July 1. The bonds are issued for $185,788 to yield the market interest rate of 7%. On the first semiannual interest payment date, July 1, 2015, the company recorded $6,503 in interest expense and $503 in discount amortization. The interest payment is $6,000. Using the effective-interest method, what is the carrying amount of the bounds on the January 1, 2016 balance sheet?

Explanation / Answer

Computation of the carrying amount of the bonds on the January 1, 2016 balance sheet using the effective-interest method.We have,

Note:Under effective interest method of amortization of bond, the bond discount amortized each year is equal to the difference between the interest expense based on the market interest rate and the carrying amount of the bond.Interest payabe on the bond is based on the stated coupon rate and face value.

Here, bond amortization of the discount bond by $ 503 and interest payble by $ 6,000 each half-yearly.

Carrying amount of the bond as on January 1, 2016 = $ 185,788 + $ 503 = $ 186,291

Answer: (B) $ 186,291

  

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