[xmas]

On April 1, 2010, Saxe Inc. purchased $200,000 face

value, 9% US Treasury Notes for $198,500, including

accrued interest of $4500. The notes mature July 1, 2011

and pay interest semiannually on Jan 1 and Jul 1. Saxe

uses SL amortization and intends to hold the notes to

maturity. Saxe does not elect the fair value option for

recording the securities. In its Oct 31, 2010 balance

sheet, the carrying amount of this investment should be ….

What I thought was….

Discount on bonds = FV – BV = 200,000 – (198,500 – 4500) = 6000

unamortized premium/Discount = 6000 * (7/15)= 2800

Carrying amt = FV – unamortized Disc = 200,000 – 2800 = 197200

In fact the answer is 196,800 which probably is BV + 2800.

[Anonymous]

Whenever you have a bond discount/premium, you add/subtract the amortized amount to the carrying value not the face value. The way you approached it is subtracting the amortized amount from the face value.

So when you first record a bond, it is recorded at it's discounted or premium price (i.e. what you paid for it). In this case, the bond was purchased for $198,500 including $4500 of accrued interest. This means the carrying value of is equal to $198,500 – $4500 = $194,000.

The amortization of the discount was as you said the $6000 * (7.15) = $2800. To get the carrying value as of October 31, add the $2800 back to the $194,000 to get $196,800.

Always remember with bonds that you are trying to ultimately get back to the face value, so for a discount you would add back the amortization and for a premium you would subtract the amortization from the carrying value.

That make more sense?

[Anonymous]

The 2800 you're calculating isn't the amount unamortized, it's the amount to be amortized for the period (April to October = 7 months). That seems to be the hiccup here.

Carrying value + Discount amortization = 194,000 + 2800 = 196,800.

Or using your same calculation method of face minus unamortized discount, 200,000 – 3200 = 196,800.

[Anonymous]

I'm not quite sure what you're asking, particularly about the unamortized amount.

The carrying value as of October should be the original carrying value at April ($194,000) plus the amount to be amortized for the period ($2,800), which would give you the $196,800.

When you're calculating the carrying value of bonds you always add/subtract the amortized discount/premium to the carrying value. Generally, the unamortized amount doesn't come into play unless the question specifically asks for the unamortized premium/discount left on the bond.

[xmas]

Thanks so much…Got it.

[Author]

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