A company issues $24900000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24324441. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet

$24,353,219

Explanation:

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Discount on the bond = Face value - cash proceeds = $24,900,000 - $24,324,441 = $575,559

According to straight line amortization

Discount charged in the period = $575,559 / 20 = $28,778 per year = $14,389 per six months

Cash payment of interest = $24,900,000 x 5.8% = $1,444,200 per year = $722,100 per six months

As on December 31, 2020, one year has passed since the bond is issued. We will calculate annual interest expense

Total Interest Expense = $1,444,200 + $28,778 = $1,472,978

Bond Carrying value will be the net of bond book value and un-adjusted discount balance.

Carrying value of Bond = 24,900,000 - (575,559 - 28,778) = $24,353,219

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