The bonds are purchased including accrued interest, the interest component in the purchase price of the bond will be the interest for two months (January and February, year 1), which will be $4,000 (i.e. $200,000 x 12% x 2 / 12). That means that the purchase price of the bond is $196,000 (i.e. $200,000 - $4,000). Discount of $4,000 will be amortized for 16 months (from March 1, year 1 to June 30, year 2). Discount amortized for 10 months, which will be added to the carrying value of the bond for year 1 will be $2,500 (i.e. $4,000 x 10 / 16). Thus, the carrying value of the bond at the end of year 1 will be $198,500 (i.e. $196,000 + $2,500).