Question

Cronos issues $3,000,000, 7.6%, 10-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and Cronos issues $3,000,000, 7.6%, 10-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $2,918,468. Using effective-interest method of amortization,

what will the carrying value of bonds be on the December 31, 2017 balance sheet?

Answer 1

Based on the information available in the question, we can calculate the carrying value of the bonds on December 31, 2017 as follows:-

Date	Interest Paid	Interest Expense	Discount Amortization	Bond Carrying Amount
January 1, 2016				2,918,468
June 30, 2016	114,000	116,739	2,739	2,921,207
December 31, 2016	114,000	116,848	2,848	2,924,055
June 30, 2017	114,000	116,962	2,962	2,927,017
December 31, 2017	114,000	117,081	3,081	2,930,098

Interest payable is calculated as follows:- $3,000,000 * 7.6% * 6 months/12 months = $114,000

Interest expense for the period is calculated using the following formula:-

=Carrying Amount * 8% * 6 months/12 months

For example :- June 30, 2016 , Interest expense = $2,918,468* 8% * 6 months/12 months = $116,739(Rounded)

The difference between Interest expense and Interest paid is the discount amortization which is added to the Carrying value of the bond.

Based on the above calculation, the carrying value of the bonds on the December 31, 2017 is $2,930,098.

Please let me know if you have any questions via comments and all the best :)