Question

On January 1, Year 1, Weller Company issued bonds with a $380,000 face value, a stated...

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.)

Homework Answers

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

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