Question

On January 1, Marigold Corp. issued $5600000, 9% bonds for $5295000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Marigold uses the effective-interest method of amortizing bond discount. At the end of the first year, Marigold should report unamortized bond discount of

Answer 1

Total discount on Bond payable = Face value of the Bond – Issue price

= $5,600,000 - $5,295,000

= $305,000

Cash paid = Face Value x Annual coupon rate

= $5,600,000 x 9.00%

= $504,000

Interest expenses = Issue price x Market rate of interest

= $5,295,000 x 10.00%

= $529,500

The amount of discount amortized for the first year = $529,500 - $504,000

= $25,500

Balance of unamortized bond discount at the end of first year

Therefore, the balance of unamortized bond discount at the end of first year = Total discount on Bond payable - amount of discount amortized for the first year

= $305,000 - $25,500

= $279,500

“Hence, the Marigold should report unamortized bond discount of $279,500”