Question

On January 2, 2019, Kampai Sushi Bar sold $800,000 of bonds for $785,000. The bonds will mature in 10 years and pay interest annually on December 31. The company properly recorded the payment of interest and amortization of the discount using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of 2019?

a. The carrying value will be $785,000.

b. The carrying value will be greater than $785,000.

c. The unamortized premium will be more than $15,000.

d. The carrying value will be less than $785,000.

On January 1, 2019, Kaiser Permanente issued $2,000,000 of 8% bonds at par. These bonds are due in 10 years with interest payable semi-annually on June 30 and December 31. What is the amount of the interest expense in 2019 assuming the use of the effective interest amortization method?

a. $160,000

b. $2,000,000

c. $1,600,000

d. $16,000

Answer 1

1

The carrying value will be greater than $785,000.

The amount of discount is added to carrying value each year and thus carrying value increases each year

Option B is correct

2

Amount of the interest expense in 2019 = 2000000*8% = $160,000

Option A is correct