On December 31, 2014, Celine Dion Company issued $400,000 of 10.5%, 5 year conds

Question

On December 31, 2014, Celine Dion Company issued $400,000 of 10.5%, 5 year conds with an effective interest rate of 10%. Interest was payable semiannually on June 30 and December 31 and the effective interest method was used. What would be the book value of the bonds on December 31, 2015 after the interst payment was made (rounded to the nearest $1)? (Present value of $1 at 5% for 10 periods= .61391; PVOA of $1 at 5% for 10 periods= 7.72173)

A. $400,000

B. $406,461

C. $406,967

D. $407,720

E. None of the above

Please show work.  

Explanation / Answer

Amount PV factor Present value Interest 21000 7.72173 162156 Principal 400000 0.61391 245564 Issue price 407720 Date Cash interest Interest expense Premium amortization Carrying value Dec-31-14 407720 June-30-15 21000 20386 614 407106 Dec-31-15 21000 20354 646 406461 Option B is correct

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