• Explanation

Bonds are usually sold for an issue price (ie, market value) different from their face (ie, stated) value. If the issue price is more than the face value, then the bond is sold at a premium. This premium must be amortized over the life of the bond using the effective interest method, which approximates the changes in the present value of the bond liability over its life.

Some companies use the straight-line method to amortize bond premiums (or discounts). Although this method is not in accordance with GAAP, it may be used if the difference is immaterial. The straight-line method results in higher amortization in the earlier periods of the bond's life, yielding different annual amortization of the premium (or discount) than the effective interest method.

Regardless of method, the same total amount of premium is amortized. At maturity, the total amortization will be the same under both methods.

Although Dean Co. incorrectly used the straight-line method, at maturity (June 30, Year 12) the premium will be fully amortized, meaning that the total amortization will be the same. Therefore, at the date of maturity, there will be no effect on the carrying amount (ie, carrying value) or retained earnings (Choices A, B, and C).

Things to remember:
The straight-line method of bond discount/premium amortization is not in accordance with GAAP.  If it is used instead of the effective interest method, it will result in different annual amortization during the bond's life.  However, at maturity, both methods will fully amortize the discount/premium and have the same total amortization amount.