Question

On January 1, Year 1, Worthy Co. issued $1,000,000 of bonds payable. The bonds mature in five years on December 31, Year 5, and pay 9% interest once a year on December 31. The issue sold for $891,857 to yield 12%. Worthy uses the effective interest method. What is the amount of the liability at December 31, Year 2, after the second interest payment?
a. $1,000,000
b. $931,590
c. $908,880

Answer 1

Answer:

$927,946

Explanation:

journal entry to record bond issuance:

Dr Cash 891,857

Dr Discount on bonds payable 108,143

    Cr Bonds payable 108,143

amortization of bond discount = ($891,857 x 12%) - $90,000 = $17,023

bond's carrying value at the end of year 1 = $908,880

amortization of bond discount = ($908,880 x 12%) - $90,000 = $19,066

bond's carrying value at the end of year 1 = $927,946