Auerbach Inc. issued 6% bonds on October 1, 2016. The bonds have a maturity date

Question

Auerbach Inc. issued 6% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $430 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 6%.

Assuming that Auerbach issued the bonds for $371,562,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2017?

A. $369,808,860

B. $356,699,000

C. $386,424,000

D. $358,662,024

Explanation / Answer

Journal entry at the issue of Bond

Dr cash $371562000

Dr discount on bonds payable $58438000

Cr bonds payable $430000000

Under the effective intrest rate method the Bond dicount is go be amortized . calculated as follows.

Intrest on bonds at the rate of 3% ( semiannual) on face value is 12900000.

Intrest according to market intrest rate of 3%(semiannual) on book value ( 371562000) is 11146840.

Amortization of Bond discount = 11146860 -12900000

= -1753140

Net Bond liability on March 31,2017 is :-

Bonds payable = $430000000

Less discount on bonds payable ($58438000+$1753140)=$ 60191140

Book value =$ 369808860

Correct answer is A.

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