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Yount, Inc. issues $400,000 of 20-year, 9 percent bonds at 95. Interest is paid semiannually, and...

Yount, Inc. issues $400,000 of 20-year, 9 percent bonds at 95. Interest is paid semiannually, and the effective interest method is used for amortization. Assume that the market interest rate for similar investments is 10 percent and that the bonds are issued on an interest date.

What amount was received for the bonds?

How much interest is paid each interest period?

How much bond interest expense is recorded on the first interest date (after the issue date)?

What is the carrying value of the bonds after the first interest date (after the issue date)?

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1. What amount was received for the bonds? Amount received Face value of the bonds x 95% -$400,000 x 95% -$380,000 2. How much interest is paid each interest period? Interest period - 6 months Interest rate prescribed on the bond agreement-9% -)for l year -4.5% -)for 6 months Interest paid for each interest period = Face value of the bonds x Interest rate prescribed on the bond agreement $400,000 x 4.5% S18,000 for each interest period 3. How much bond interest expense is recorded on the first interest date (after the issue date)? Under effective interest rate method ofamortizing bond discount, to arrive at each accounting periods interest expense, effect interest rate (Yield rate or market rate) is multiplied times the bonds book value (not face value) at the start of the accounting period. Face Value of Bond = $400,000 Less: Bond discount Book Value of the bond S380.000 20,000 Effective Interest rate or Yield rate-10% for 1 year 5% → for 6 months (interest period) Interest expense to be recognized-bonds book value at the beginning of year x Yield rate $380,000 x 5% - $19,000 Note: However, actual interest paid to bond holders during the accounting period is $18,000. The difference of $1,000 ($19,000 - $18,000) represents the amortized amount of bond discount during the interest period4. What is the carrying value of the bonds after the first interest date (after the issue date)? Face value of the bond - $400,000 Unamortized discount -Total discount - discount amortized during the first interest period = $20,000-$1,000. - $19,000 Note: *$1,000 discount amortized Interest expense reported during the first interest period - Interest actually paid $ 19,000 _ $ 18,000 $1 .000 Carrying value / book value = Face value-Unamortized discount 400,000-$ 19,000 $381,000

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