On January 1 of Year 1, Congo Express Airways issued $3,600,000 of 8% bonds that

Question

On January 1 of Year 1, Congo Express Airways issued $3,600,000 of 8% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,300,000 and the market rate of interest for similar bonds is 9%. 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: $4,024,000. $3,464,000. $3,176,000. $3,320,000. $3,880,000.

Explanation / Answer

Discount on issue of bonds = Par value of bonds - Issue price of bonds = $3,600,000 - $3,300,000 = $300,000

Discount amortised every six months = $10,000

Discount amortised upto December 31 = $10,000 * 2 =$20,000

Unamortised discount on issue of bonds = $300,000 - $20,000 = $280,000

Interest for the half year ending Decmeber 31 = $3,600,000 * 8% * 1/2 = $144,000

Assuming the interest for the half year ending December 31 has not be paid:

Carrying value of bond = Par value of bond - Unamortised discount on issue of bond + Interest accrued

Carrying value of bond = $3,600,000 - $280,000 + $144,000 = $3,464,000

Hence, answer is $3,464,000

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