On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 offering a 4% discount. They had a 20 year term, a stated rate of interest of 7%, and an effective rate of interest of 7.389%. Assuming Residence uses the effective interest rate method, the carrying value of the bond liability on January 1, Year 1 is (round any necessary computations to the nearest whole dollar) (A) $3,499 (B) $3,500 (C) $3,547 (D) $3,600

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Business

Brooke Carter

13 October, 13:51

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 offering a 4% discount. They had a 20 year term, a stated rate of interest of 7%, and an effective rate of interest of 7.389%. Assuming Residence uses the effective interest rate method, the carrying value of the bond liability on January 1, Year 1 is (round any necessary computations to the nearest whole dollar) (A) $3,499 (B) $3,500 (C) $3,547 (D) $3,600

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Answers (1)

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Cloe Pittman · Answer 1

caring value of bond liability is $48000

interest expense = $3547

annual coupon = 3500

amount of bond discount amortization is $47

Explanation:

given data

face value = $50,000

bonds issue = 96

discount = 4%

time = 20 year

interest = 7%

effective rate of interest = 7.389%

to find out

compound annual coupon

solution

we have given face value and discount 4 %

so issue price will be

issue price = 96% of face value

issue value = 96% * 50000 = $48000

and

interest expense is here by effective interest rate is

interest expense = 7.389% of $48000

interest expense = $3547

and

annual coupon is here

annual coupon is 7% of face value

annual coupon = 7% * 50000

annual coupon = 3500

and

amount of bond discount amortization is 3547 - 3500 = $47