Question

On January 1 of Year 1, Congo Express Airways issued $3,400,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,100,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months. After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

Multiple Choice

• $3,680,000.

• $3,799,000.

• $3,001,000.

• $3,239,000.

• $3,120,000.

Answer 1

Par value of bonds = $3,400,000

Bond issue price = $3,100,000

Discount on bonds payable = Par value of bonds -  Bond issue price

= 3,400,000 - 3,100,000

= $300,000

The bond discount is being amortized at a rate of $10,000 every six months.

Bond discount amortized in year 1 = 10,000 x 2

= $20,000

Unamortized bond discount on December 31, Year 1 = Discount on bonds payable - Bond discount amortized in year 1

= 300,000 - 20,000

= $280,000

Carrying value of bonds payable on December 31, Year 1 = Par value of bonds - Unamortized bond discount on December 31, Year 1

= 3,400,000 - 280,000

= $3,120,000

Interest payable on December 31, year 1 = Par value of bonds x Stated interest rate x 6/12

= 3,400,000 x 7% x 6/12

= $119,000

After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of = Carrying value of bonds payable on December 31, Year 1 + Interest payable on December 31, year 1

= 3,120,000 + 119,000

= $3,239,000

Fourth option is correct.