On January 2, 2015, Santa Ana Co. issued 10% bonds with a face amount of $1 mill

Question

On January 2, 2015, Santa Ana Co. issued 10% bonds with a face amount of $1 million that mature on January 2, 2030. The bonds were issued to yield 8%, resulting in a premium of $172,922. Santa Ana incorrectly used the straight-line method instead of the effective-interest method to amortize the premium. How is the carrying amount of the bonds affected by the error?

At December 31, 2015: Overstated $6,439; At January 2, 2030: Understated

At December 31, 2015: Understated $5,238; At January 2, 2030: No effect

At December 31, 2015: Understated $6,942; At January 2, 2030: No effect

At December 31, 2015: Overstated $4,272; At January 2, 2030: No effect

Explanation / Answer

Actual Amortization done in 2015 = 172,922/15

= $11,528

..

Amortization actually to be done = 172,922/(1.08^15) * 8%

= $4,361

..

Carrying Amount of the Bond is Understated by $7167 [11,528-4,361]

..

Ans = Option-3:- At December 31, 2015: Understated $6,942; At January 2, 2030: No effect (Rounding off errors)

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