Question

On January 1, Year 1, Weller Company issued bonds with a $380,000 face value, a stated rate of interest of 10.00%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8.00%. Interest is paid annually on December 31.

Assuming Weller issued the bonds for $410,240, what is the carrying value of the bonds on the December 31, Year 3? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Effective interest bond amortization table

Years	Cash interest paid at 10.00%	Bond Interest Expense at 8.00%	Annual premium amortization	Unamortized Premium	Carrying Value
Jan 1, Year 1				30,240	4,10,240
Dec 31, Year 1	38,000	32,819	5,181	25,059	4,05,059
Dec 31, Year 2	38,000	32,405	5,595	19,464	3,99,464
Dec 31, Year 3	38,000	31,957	6,043	13,421	3,93,421

*Cash interest paid = Face Value x Annual coupon rate

= $380,000 x 10.00%

= $38,000 per year

Bond Interest Expense = Previous year carrying value x Market interest rate

Therefore, the carrying value of the bonds on the December 31, Year 3 will be $393,421