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On January 1, Year 1, Sheffield Co. issued bonds with a face value of $400,000, a...

On January 1, Year 1, Sheffield Co. issued bonds with a face value of $400,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 107, 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:

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Answer #1

Answer:

Face Value of Bonds = $400000

Issue Value of Bonds = 107% * $400000
Issue Value of Bonds = $428000

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $428000- $400000
Premium on Bonds = $28000

Time to Maturity = 10 years

Annual Amortization of Premium = Premium on Bonds / Time to Maturity
Annual Amortization of Premium = $28000/ 10
Annual Amortization of Premium = $2800

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 = $428000 - 4 * $2800
Carrying Value of Bonds on December 31, Year 4 = $416800

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