Question

On January 1, Year 1, the Diamond Association issued bonds with a face value of $300,000, a stated rate of interest of 6 percent, and a 10-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 7 percent at the time the bonds were issued. The bonds sold for $278,932. Diamond used the effective interest rate method to amortize the bond discount. Required a. Determine the amount of the discount on the day of issue. b. Determine the amount of interest expense recognized on December 31, Year 1. (Round your answer to the nearest dollar amount.) c. Determine the carrying value of the bond liability on December 31, Year 1.

Answer 1

Answer:

A) $21,068

B) $1,525.24

C) $280,457.24

Explanation:

The amount of the discount = face value - market value = $300,000  - $278,932 = $21,068

Amount of interest recognized on December 31, year 1 = ($278,932 x 7%) - ($300,000 x 6%) = $19,525.24 - $18,000 = $1,525.24

Carrying value of the bond liability = $278,932 + $1,525.24 = $280,457.24