[005]

Hi everyone, hope the studying is going well. Just got a quick question I hope someone on here can help me with.

(From Wiley 2012 – FAR; Module 13B, Number 14)

On January 2, 2010, West Co. issued 9% bonds in the amount of $500,00, which mature on January 2, 2020. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount and does not elect the fair value option for reporting financial liabilities. In its June 30, 2010 balance sheet, what amount should West report as Bonds Payable?

a. 469,500
b. 470,475
c. 471,025
d. 500,000

Correct answer: b. 470,475.

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Now, wouldn’t the $470,475 be the Carrying Amount?

Thanks!

 

 

BEC - ✔
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AUD - ✔
FAR - 11/29/14

CPAExcel, Ninja MCQs, and a sh*t ton of coffee

[NYCaccountant]

Bond payable is the same thing as the carrying amount. The unamortized discount is a contra liability account in the

liabilties section of the balance sheet for Bonds payable. This contra account basically discounts the maturity value of the bond (500,000) down to it's present value as of the balance sheet date. I think of it as similar to accounts receivable net of the allowance account. Remember that you when first issued the bond, the holder only paid 469,500, which was the present value of the bond on that date. Thats's essentially what you owe as of the initial date and the difference between the face value (500,000) and carrying amount (469,500) will be extra interest expense recognized over the life the bond. Because this will be recognized over the life of the bond, you don't owe the full 500,000 yet, but just 469,500.

FAR - 93
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[005]

Thanks NYCaccountant!

I guess what's confusing me is, when this bond was issued it was recorded as so:

Cash………469,500

Discount….30,500

……….Bonds Payable….500,000

So I was just thinking the Bonds Payable account had to derive from the 500,000

Thanks for the help. I'll keep working on it.

BEC - ✔
REG - ✔
AUD - ✔
FAR - 11/29/14

CPAExcel, Ninja MCQs, and a sh*t ton of coffee

[thehip41]

Bond payable net of unamortized discount

So yes, this amount is the carrying value.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Author]

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