On 1 January 2013, Mary Inc issues $1,000,000 face value, 10-year bonds with annual interest rate...
On 1 January 2013, Mary Inc issues $1,000,000 face value, 10-year bonds with annual interest rate of 5% to be paid each 31 December. The market interest rate is 4%.
Using the effective interest rate method of amortization, Mary Inc should record when it closes its annual book on Dec 31, 2015
Group of answer choices
a carrying amount of 1,081,109 on Dec 31, 2015
an interest expense of 42,974 on Dec 31, 2015
a cash disbursement of 43,244 on Dec 31, 2015
a carrying amount of 1,060,021 on Dec 31, 2015
an amortization of discount of 7,307 on Dec 31, 2015
Homework Answers
| A carrying amount of 1,060,021 on Dec 31, 2015 | ||||
| Option D is correct | ||||
| Workings: | ||||
| Amount | PV factor 4% | Present value | ||
| Cash Annual interest | 50000 | 8.11090 | 405545 | |
| Principal | 1000000 | 0.67556 | 675564 | |
| Total | 1081109 | |||
| Cash annual interest | Interest expense 4% | Premium amortized | Carrying value | |
| January 01, 2013 | 1081109 | |||
| December 31, 2013 | 50000 | 43244 | 6756 | 1074353 |
| December 31, 2014 | 50000 | 42974 | 7026 | 1067327 |
| December 31, 2015 | 50000 | 42693 | 7307 | 1060021 |
| Interest expense 4%: | ||||
| December 31, 2013 | 43244 | =1081109*4% | ||
| December 31, 2014 | 42974 | =1074353*4% | ||
| December 31, 2015 | 42693 | =1067327*4% | ||
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