Garland Company received proceeds of $188000 on 10-year 6% bonds issued on January 1 2015. The bonds had a face value of $200000 pay interest annually on January 1 and have a call price of 101. Garland uses the straight-line method of amortization. What is the carrying value of the bonds on January 1 2017?

A) $200000
B) $190400
C) $197350
D) $189200

Question

Kaeli Iyaniah · Accepted Answer

Final Answer : B, Explanation :  The carrying value of the bonds on January 1, 2017, can be calculated by first determining the annual amortization amount and then adjusting the initial carrying value for the amortization. The bonds were issued at a discount ($200,000 face value - $188,000 proceeds = $12,000 discount). Using the straight-line method, the annual amortization is the total discount divided by the bond term: $12,000 / 10 years = $1,200 per year. After two years (by January 1, 2017), $2,400 of the discount ($1,200 per year * 2 years) would have been amortized. Therefore, the carrying value on January 1, 2017, is the initial proceeds plus the amortized amount: $188,000 + $2,400 = $190,400.

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