Question

# Ava, Inc., issued 8% bonds, dated January 1, with a face amount of \$202,900 on January...

Ava, Inc., issued 8% bonds, dated January 1, with a face amount of \$202,900 on January 1, 2016 for an issue price of 89. The bonds mature on December 31, 2025 (10 years). For bonds of similar risk and maturity the market yield is 10%. Interest is paid annually on December 31. What is the carrying value of the bond on December 31,2016?

Issue value of bonds = \$202,900*89% = \$180,581

Face value of bonds = \$202,900

Discount on issue of bonds = \$202,900 - \$180,581 = \$22,319

Interest to be paid in cash for 2016 = Face Value of Bond*Interest rate

= \$202,900*8% = \$16,232

Interest expense as per effective interest method = Issue value*Market rate of interest

= \$180,581*10% = \$18,058

Discount to be credited to carrying value in 2016 = Interest expense - Interest paid in cash

= \$18,058 - \$16,232 = \$1,826

Carrying value on December 31, 2016 = Issue value+Discount to be credited

= \$180,581+\$1,826 = \$182,407

Therefore the carrying value of bonds on December 31, 2016 is \$182,407.

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