Question

On January 1, 2019, Arc Company issued a $10,000 face value bond that sold for 92.  The bond had an eight-year term and with a coupon (stated) rate of 4% annual interest.  The company uses the straight-line method of amortization.

1.    The carrying value of the bond liability on January 1, 2019, would be...

2.      The amount of interest expense reported on the 2019 income statement would be...

3.      Interest expense reported on the income statement over the life of the bond would

a.   increase by $100 each year.

b.   be the same each year.

c.   decrease by $100 each year.

d.   not be determinable on January 1, 2019.

4.      The carrying value of the bond liability on December 31, 2020 is expected to be..

a.   $10,000.

b.   $  9,200.

c.   $  9,300.

Answer 1

Part 1)

Carrying Value of Bond Liability on January 1, 2019

= Face Value *92 %

= 10000 *92%

= $ 9200

So the correct answer is $ 9200

Part 2)

Interest expense = cash interest paid + discount amortized per period

= ( 10000*4%) + ((10000-9200) /8)

= 400 + 100

= $ 500

So the correct answer is $ 500

Part 3)

The correct answer is

B) be the same each year

Explaination

Discount amortized will remain same and interest paid will also remain due to which the interest expense will also remain the same.

Part 4)

The correct answer is

C) $ 9300

Calculation

Carrying value = face value - unamortized discount

= 10000 - ( 800-100)

= $ 9300

For any help please comment in the comment box