What is the carrying amount of a bond?
Difference between the bond payable and discount amount is the carrying amount of bond.
A bond is shown as the liabilities in the books of accounts. Bond is the value of loan take by the company by making bond agreement.
The price at which the bond is purchased is known as the carrying amount of the bond. Carrying value is calculated by subtracting unamortised discount and adding unamortised premium in the face value.
For example: If the face value of a bond is $35, but it is purchased at $40, then $40 is known as the carrying amount of the bond.
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 6%, Benson Realty issues
$700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson
Realty received $713,234 in cash at issuance.
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
Preparing an amortization schedule and recording mortgages payable
Kellerman Company purchased a building and land with a fair market value of
$550,000 (building, $425,000, and land, $125,000) on January 1, 2018. Kellerman
signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of
$3,940.37. Round to two decimal places. Explanations are not required for journal
1. Journalize the mortgage payable issuance on January 1, 2018.
2. Prepare an amortization schedule for the first two payments.
3. Journalize the first payment on January 31, 2018.
4. Journalize the second payment on February 28, 2018.
Your grandfather would like to share some of his fortune with you. He offers to give
you money under one of the following scenarios (you get to choose):
1. $8,750 per year at the end of each of the next six years
2. $49,650 (lump sum) now
3. $100,450 (lump sum) six years from now
C H A P T E R 1 2
1. Calculate the present value of each scenario using a 6% discount rate. Which scenario
yields the highest present value? Round to the nearest dollar.
2. Would your preference change if you used a 12% discount rate?
Analyzing and journalizing bond transactions
On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payable with face value of $600,000. The bonds pay interest on June 30 and December 31.
1. If the market interest rate is 7% when NCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.
2. If the market interest rate is 9% when NCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.
3. The issue price of the bonds is 92. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has already been recorded.
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