On January 2, Year 4, Nast Co. issued 8% bonds with a face amount of $1 million that mature on January 2, Year 10. The bonds wer
1 answer:
Answer:
Option A: [Overstated , No effect]
Explanation:
December 31, 20X1: Overstated; January 2, 20X7: No effect
Our term period is from January 2, Year 4 to January 2, Year 10.
Total Term = 6 years.
The straight-line method uses a constant expense for the whole term, whereas, the effective-interest method uses a gradually increasing expense.
Let, us calculate the carrying amount with both approaches
After 1st Year:
Carrying amount on 2-Jan-Year1 = $1,000,000 - $150,000
Carrying amount on Year 1 = $850,000
Discount Amortization will be:
By Straight-Line Method = $150,000 / 6 yrs
By Straight-Line Method = $25,000 / yr
By Effective-Interest Method = ($850,000 * 12%) - ($1,000,000 * 8%)
By Effective-Interest Method = $22,000
Carrying amount on 31-Jan-Year1:
By Straight-Line Method = $850,000 + $25,000
By Straight-Line Method = $875,000
By Effective-Interest Method = $850,000 + $22,000
By Effective-Interest Method = $872,000
Difference of carrying value (Straight-line vs Effective Interest) will be obtained by subtracting.
Difference in Carrying Value = $875,000 - $872,000
Difference in Carrying Value = $3,000
Hence, for 1 Year period, straight-line method gives an overstatement as compared to effective-interest method.
After 6 Years:
For both approaches, the total carrying amounts at the term's end must be equal. As the same total discount amortization will occur under each method.
Hence, for 6 years period, use of any method will have no effect on the carrying amount.
You might be interested in
Answer:
$559,500
Explanation:
To find Live Co.'s expected dollar cash flows at the end of this year convert the Euro and Swiss francs amounts to dollar using their respective rates and then add all of the dollar amounts.
Swiss francs in dollars:
Euros is dollars:
Dollar cash flow:
The company's expected dollar cash flows are $559,500.