Question 1

On Jan 1, Year 1, a company issued $1,000,000 of 5% bonds at a price to yield 6%. The bonds were issued at $957,000. Interest is paid annually on Dec 31. What is the carrying value of the bonds at Dec 31, Year 1?

Accepted Answer

Effective Interest Method: 1. Calculate Interest Expense (Carrying Value * Market Rate). 2. Calculate Cash Paid (Face Value * Coupon Rate). 3. Difference is Amortization. 4. Add Amortization to Carrying Value (for discount).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using coupon rate for expense; subtracting amortization for a discount.

On Jan 1, Year 1, a company issued $1,000,000 of 5% bonds at a price to yield 6%. The bonds were issued at $957,000. Interest is paid annually on Dec 31. What is the carrying value of the bonds at Dec 31, Year 1?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 4

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