Chapter 9, Problem 1QC

Brownlee Company issued $525,000, 8%, six-year bonds for 110, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

  a.    $573,125

  b.    $577,500

  c.    $586,250

  d.    $568,750

To determine

The carrying value of bonds after one year for Company B.

Answer to Problem 1QC

Option d. $568,750.

Explanation of Solution

The carrying value of bond:

Carrying value of bond is the difference amount of face value of bond by deducting the amortized discounts and un-amortized premiums.

Following is the calculation of carrying value of bond

$\begin{array}{c}\text{Carrying}\text{value}\text{of}\text{bond}\text{=}\text{Face}\text{value}\text{of}\text{bond}-\text{Unamortized}\text{premium}\text{on}\text{bonds}\\ \text{=}\text{(1)\$577,500}-\text{(3)\$8,750}\\ \text{=}\text{\$568,750}\end{array}$

Therefore, according to the above calculation Option d. 568,750 is the correct answer and the other options of a, b and c are incorrect options.

Working notes:

$\begin{array}{c}\text{Face value}\text{of}\text{bond}\text{=}\text{Bonds}\text{payable×Issue}\text{price}\text{of}\text{bond}\\ \text{=}\text{\$525,000×}\frac{\text{110}}{\text{100}}\\ \text{=}\text{\$577,550}\end{array}$ (1)

$\begin{array}{c}\text{Premium}\text{on}\text{bonds}\text{=}\text{Bonds}\text{payable}\text{× premium}\text{allowed}\text{for}\text{bonds}\\ \text{=}\text{\$525,000×}\frac{\text{10}}{\text{100}}\\ \text{=}\text{\$52,500}\end{array}$ (2)

$\begin{array}{c}\text{Unamortized}\text{premium}\text{on}\text{bond}\text{=}\frac{\text{Premium}\text{on}\text{bond}}{\text{Number}\text{of}\text{years}}\\ \text{=}\frac{\text{(2)\$52,500}}{\text{6}\text{years}}\\ \text{=}\text{\$8,750}\end{array}$ (3)