Question

A corporation issued $600,000, 10%, 5-year bonds on January 1, 2017 for $648,666, which reflects an effective-interest rate of 7%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the carrying value of the bonds on January 1, 2019 is

Select one:

a. $617,911

b. $629,198.

c. $626,001.

d. $638,932.

e. $633,817.

Answer 1

Answer:

correct option is a. $617,911

Explanation:

given data

issued = $600,000

rate = 10 %

time 5 year

amount  = $648,666

effective-interest rate =  7%

solution

we get here carrying value so first we get here Interest paid per semiannual period that is

Interest paid per semiannual period = $600000 ×10% × $\frac{6}{12}$  

Interest paid per semiannual period = $30000

and

Interest expense on 30 June = $648666 × 7% × $\frac{6}{12}$  

Interest expense on 30 June = $22703

and

Interest expense on 30 December = $641369 × 7% × $\frac{6}{12}$  

Interest expense on 30 December = $22448

so

Interest expense on 30 June  = ($641369 - $7552) × 7% × $\frac{6}{12}$  

Interest expense on 30 June = $22184

and

Interest expense on 30 December = ($633817 - $7816) × 7% × $\frac{6}{12}$  

Interest expense on 30 December = $21910

so as that we get Carrying value of 1st January that is

Carrying value of January 1 =  $633817  - $7816-8090

Carrying value of January 1 = 617911

so correct option is a. $617,911