On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds f

Question

On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while 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. The company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of: Multiple Choice $3,220,000. $3,342,500. $3,097,500. 3,780,000. $3,902,500

Explanation / Answer

Correct Answer--- $ 3,220,000

Calculations

Issue value of Bond

$ 3,200,000.00

Add: Amortization value for first half year

$        10,000.00

Add: Amortization value for Second half year

$        10,000.00

Carrying value of bond at the end of Year 1

$ 3,220,000.00

The carrying value will become equal to Par value of bond at the time of Maturity.

Issue value of Bond

$ 3,200,000.00

Add: Amortization value for first half year

$        10,000.00

Add: Amortization value for Second half year

$        10,000.00

Carrying value of bond at the end of Year 1

$ 3,220,000.00

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