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CFA Level I · CFA Level I Exam · Analyzing Balance Sheets

A company issues a 3-year, 4% annual-coupon bond with face value $1,000,000 when the market rate is 6%, so it receives $946,500. Under IFRS using the effective interest method, the carrying amount of the bond at the end of year 1 is closest to:

The carrying amount is about $963,300. Interest expense at the 6% market rate is $56,790, the coupon paid is $40,000, and the $16,790 difference accretes the discount, raising the liability from $946,500. It reaches face value only at maturity.

  1. A$946,500
  2. B$963,300Correct
  3. C$1,000,000

Explanation

Interest expense = 946,500 × 6% = 56,790. Coupon paid = 1,000,000 × 4% = 40,000. Discount amortization = 16,790, so carrying amount = 946,500 + 16,790 = 963,290, about $963,300. Using the coupon as expense would leave the balance unchanged at $946,500, and $1,000,000 is only reached at maturity.

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