Question

In October 1, 2018, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2027, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2018 balance sheet at a carrying value of
A. $3,903,000.
B. $3,960,000.
C. $3,900,000.
D. $3,961,750.

Answer 1

Answer:

A. $3,903,000.

Explanation:

The computation of the carrying value of the bond is shown below:

But before that first we have to do following calculations

The value of the bonds is

= $3960,000 - $60,000

= $39,00,000

Since it is a accrued interest and the same is to be deducted

Now the bond sold at discount so the amount would be

= $4,000,000 -$ 3,900,000

= $100,000

And, the period of the bonds is October 1, 2018 to February 1, 2027 i.e 100 months  

= 3 months in 2018 + 96 months + 1 months in 2027

The 96 months represents the 8 years

And, discount amortized from October 1, 2018 to December 31 , 2018 is

= $100,000 × 3 ÷ 100

= $3,000

The 3 represents the 3 months and 100 represent the total months

So, the  carrying value of the bonds is

= $3,900,000 + $3,000

= $3,903,000