Here's an example of cash paid being MORE than the carrying amount at a DISCOUNT.
BUT, I think this goes against wiley's explanation. so now I'm confused.
On July 1, Year 2, York Co. purchased as a long-term investment $1 million of Park, Inc.’s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, Year 2, balance sheet, what amount should York report as investment in bonds?
The bond investment’s original balance was $906,000 ($946,000 price – $40,000 accrued interest) because the carrying amount does not include accrued interest paid. Under the effective interest method, interest income equals the yield or effective interest rate times the carrying amount of the bonds at the beginning of the interest period. The amortization of premium or discount is the difference between this interest income and the periodic cash payments. For Year 2, interest income is $45,300 [$906,000 × 10% × (6 ÷ 12)], and the actual interest is $40,000 [$1,000,000 × 8% × (6 ÷ 12)]. Hence, the carrying amount at year-end is $911,300 [$906,000 + ($45,300 – $40,000)].
In essence, you paid 946,000 for the bond, however, the bond's carrying amount was 906,000 (946-40 accrued interest). The discount would be 94,000 (1million – 906k).
AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE
IM GOING TO BE A CPA!!!!!
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