ExpertMedium1 markMultiple Choice
CPA · Question 32 · Area II: Balance Sheet Accounts
On January 1, Year 1, Bond Co. issued 1,000 bonds with a face value of $1,000 each at 98. The bonds pay 5% interest annually. Bond issuance costs were $10,000. <br/><br/>What is the initial carrying amount of the bond liability?
On January 1, Year 1, Bond Co. issued 1,000 bonds with a face value of $1,000 each at 98. The bonds pay 5% interest annually. Bond issuance costs were $10,000. <br/><br/>What is the initial carrying amount of the bond liability?
Answer options:
A.
$980,000
B.
$970,000
C.
$990,000
D.
$1,000,000
How to approach this question
Under ASU 2015-03, debt issuance costs are a direct deduction from the carrying amount of the liability (like a discount).
Full Answer
B.$970,000✓ Correct
Initial Liability = Proceeds - Issuance Costs.<br/>Proceeds = $1,000,000 * 98% = $980,000.<br/>Less Costs: $10,000.<br/>Net Carrying Amount = $970,000.
Common mistakes
Recording issuance costs as an asset (deferred charge) - old GAAP.
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