Nicholas Smith Fitness Gym Bonds Payable Calculation

Calculating Nicholas Smith Fitness Gym's Bonds Payable

Nicholas Smith Fitness Gym has $700,000 of 20-year bonds payable outstanding. These bonds had a discount of $56,000 at issuance, which was 10 years ago. The company uses the straight-line amortization method. The current carrying amount of these bonds payable is:

A. $672,000.

B. $644,000.

C. $700,000.

D. $728,000.

Question:

What is the current carrying amount of Nicholas Smith Fitness Gym's bonds payable after 10 years using the straight-line amortization method?

Final answer:

The current carrying amount of Nicholas Smith Fitness Gym's bonds payable, after 10 years using the straight-line amortization method, is $672,000.

Explanation:

The student is asking about the current carrying amount of bonds payable for a company that issued these bonds 10 years ago with an original discount. The bonds were originally issued at a $56,000 discount over 20 years and the company uses the straight-line amortization method to amortize the discount. Since 10 years have passed, we need to calculate the amount of discount amortized to find the carrying amount of the bonds.

To determine the current carrying amount, we first calculate the annual amortization amount, which is the total discount divided by the number of years to maturity ($56,000 / 20 years = $2,800 per year). Over 10 years, the amortized amount would be $2,800 times 10, which equals $28,000. Subtract this amount from the original discount to find out how much of the discount remains unamortized ($56,000 - $28,000 = $28,000).

Next, to find the current carrying amount, we subtract the unamortized discount from the face value of the bonds ($700,000 - $28,000 = $672,000). This provides us with the current carrying amount of the bonds payable, which is Option A, $672,000.