Choice "C" is correct. The maturity date is 6 years from the issuance date. Annual straight-line amortization of the discount equals $25,000 [$150,000/6 years]. At the end of Year 1, using straight-line amortization, the bond carrying value equals $875,000 [$1,000,000 face value less $125,000 ($150,000 - $25,000) unamortized discount]. Using effective interest amortization, Year 1 interest expense is $102,000 [$850,000 x 12%], interest paid is $80,000 [$1,000,000 x 8%], discount amortized is $22,000 [$102,000 - $80,000]. Thus, the discount balance is $128,000 [$150,000 - $22,000] and the bond carrying value is $872,000 [$1,000,000 - $128,000]. At December 31, Year 1, the bond carrying value is overstated using straight-line amortization [$875,000 vs. $872,000]. At January 2, Year 7, the bond carrying value will be the maturity value, regardless of the amortization method used, since this is the maturity date.
Choice "b" is incorrect. At January 2, Year 7, the bond carrying value will be the maturity value, regardless of the amortization method used, since this is the maturity date.
Choice "d" is incorrect. At December 31, Year 1, the bond carrying value is overstated using straight-line amortization [$875,000 vs. $872,000]. At January 2, Year 7, the bond carrying value will be the maturity value, regardless of the amortization method used, since this is the maturity date.
Choice "a" is incorrect. At December 31, Year 1, the bond carrying value is overstated using straight-line amortization [$875,000 vs. $872,000].