ExpertHard1 markMultiple Choice
CPA · Question 11 · Area II: Balance Sheet Accounts
On January 1, Year 1, Cascade Corp. issued $1,000,000 of 8% bonds at 95, with interest payable semiannually on June 30 and December 31. The bonds mature in 5 years. Cascade uses the effective interest method.<br/><br/>What is the carrying amount of the bonds on December 31, Year 1?
On January 1, Year 1, Cascade Corp. issued $1,000,000 of 8% bonds at 95, with interest payable semiannually on June 30 and December 31. The bonds mature in 5 years. Cascade uses the effective interest method.<br/><br/>What is the carrying amount of the bonds on December 31, Year 1?
Answer options:
A.
$950,000
B.
$955,000
C.
$960,000
D.
$1,000,000
How to approach this question
Start with initial carrying amount (issue price). Under effective interest method, calculate interest expense using market rate, subtract cash interest paid, and add the difference to carrying amount. Repeat for each interest period.
Full Answer
B.$955,000✓ Correct
Bonds issued at discount have a carrying amount that increases over time as the discount amortizes. The effective interest method amortizes the discount based on the difference between interest expense (market rate × carrying amount) and cash interest paid (stated rate × face value). The question requires calculating the effective interest rate from the issue price.
Common mistakes
Using face value instead of carrying amount, not amortizing the discount, or using straight-line instead of effective interest method
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