On January 1 of Year 1, Congo Express Airways issued $4,000,000 of 5% bonds that

Question

On January 1 of Year 1, Congo Express Airways issued $4,000,000 of 5% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,610,000 and the market rate of interest for similar bonds is 6%. The bond premium or discount is being amortized at a rate of $13,000 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:

$4,364,000.

$3,636,000.

$4,464,000.

$3,736,000.

$3,536,000.

Explanation / Answer

Answer:$3,736,000

(par value of the bonds $4,000,000 - unamortized discount 364,000 = $3,636,000 carrying value of bonds + 100,000 ($4,000,000 x 5% x 6/12) interest accural on Dec 31 = $3,736,000)

unamortized discount=4000,000-3610,000-(13000*2)=364000

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