CFA Practice Question

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CFA Practice Question

On January 1, 2013, Brick Landing Corporation issued $5 million in bonds payable at a premium that matures on 12/31/2022. It is now 2015 and interest rates have risen compared to rates when the bonds were issued. The proper valuation for the bonds payable on 12/31/2015 is ______.

A. discounted present value using the historical effective yield rate (or carrying value)
B. discounted present value using the current effective yield rate
C. the lower of cost or market price
Correct Answer: A

Bonds payable are valued at the discounted present value of the future cash flow, using the yield rate that was effective when the bonds were issued.

User Contributed Comments 4

User Comment
unpredictor Presuming accounting valuation required, not economic or analytical.
sarag Does this mean that unearned revenue account = Liability? But I think that liability is something which we have already got the service but did not settle the account for that service. Please clarify?
yesir Yes unearned revenue is a liability. Example: you have received up front subscription fees for a magazine. You are still required to deliver the magazine so therefore you have a liability. Over time as you deliver your service, you then add to your revenue and reduce your liability account (unearned revenue). Hope this helps.
Gpcurve I agree with unpredictor. The bonds should be carried at historical, but the value of the bond is determined by the market. What one does with that valuation is a different question. (in this case, it's ignored (or footnoted)).
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