On January 1, 2005, Crowe Company issued $1,000,000 of bonds with a face rate of 6 percent that are due to mature January 1, 2011. The market rate of interest was 10 percent at the date of issuance, which resulted in a discount of $100,000. Crowe incorrectly used the straight-line method of amortization for the bond discount instead of the effective interest method. How is the carrying value of the bonds affected by the error?
At 12/31/2005 At 12/31/2010
a. Overstated Understated
b. Understated Overstated
c. Overstated No effect
d. Understated No effect