On January 1, Year 1, Sheffield Co. issued bonds with a face value of $200,000, a...
On January 1, Year 1, Sheffield Co. issued bonds with a face value of $200,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 105, and interest is payable each December 31. Sheffield uses the straight-line method to amortize the bond discount.
The carrying value of the bonds that would be reported on the December 31, Year 4 balance sheet is:
Multiple Choice
A. $204,000.
B. $200,000.
C. $205,000.
D. $206,000.
Homework Answers
Answer is $206,000
Face Value of Bonds = $200,000
Issue Value of Bonds = 105% * $200,000
Issue Value of Bonds = $210,000
Premium on Bonds = Issue Value of Bonds - Face Value of
Bonds
Premium on Bonds = $210,000 - $200,000
Premium on Bonds = $10,000
Time to Maturity = 10 years
Annual Amortization of Premium = Premium on Bonds / Time to
Maturity
Annual Amortization of Premium = $10,000 / 10
Annual Amortization of Premium = $1,000
Carrying Value of Bonds on December 31, Year 4 = Issue Value of
Bonds - Amortization of Premium during 4 years
Carrying Value of Bonds on December 31, Year 4 = $210,000 - 4 *
$1,000
Carrying Value of Bonds on December 31, Year 4 = $206,000
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