Question

On January 1, a company issued and sold a $430,000, 5%, 10-year bond payable, and received proceeds of $420,000. Interest is payable each June 30 and December 31. The company uses the straight line method to amortize the discount. The carrying value of the bonds immediately after the second interest payment is

Answer 1

Generally in case of Bonds, either they are issued at Premium or discount. Such premium or discounts on issue of bond should be amortized over the term of bond. If they are using straight line method then equal amount of discount will be amortized every year or semi annually as and when interest payment is made. Based on above example, we see the following steps:

1- When $430000 bond is issued at $420000, that means they are issued at a discount of $10000. They will be recorded by debiting the 'Discount on Bonds payable A/C' for $10000, debiting 'Cash A/C' for $420000 and 'Bonds payable A/C' for $430000.

2- Since straight line method is used, equal amount of discount will be amortized every year. Since this is 10-year bond, therefore discount of $10000 will be amortized by $1000 every year.

3- This amortization will take place on June 30 and December 31 along with interest payment. So $1000 discount of 1 year will be amortized by the amount of $500 twice in a year on June 30 and December 31, by crediting 'Discount on Bonds payable A/C' for $500 at the time of interest payment, this way after 10 years, entire amount of discount will be evenly amortized

Carrying value of bonds will include unamortized portion of discount. In the given case, after 2nd interest payment, the total amount of interest amortized is ($500 X 2) $1000 out of total $10000 discount. So $9000 is still unamortized portion of discount. Thus carrying value of bond after 2nd interest payment = (Value of Bond payable - Unamortized discount) => ($430000 - $9000) = $421000

Hence carrying value of bond immediately after the second interest payment is $421000