On January 1 of Year 1, Drum Line Airways issued $2,500,000 of par value bonds f

Question

On January 1 of Year 1, Drum Line Airways issued $2,500,000 of par value bonds for $2,260,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 5% while the market rate of interest for similar bonds is 6%. The bond premium or discount is being amortized at a rate of $8,000 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:

On January 1 of Year 1, Drum Line Airways issued $2,500,000 of par value bonds for $2,260,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 5% while the market rate of interest for similar bonds is 6%. The bond premium or discount is being amortized at a rate of $8,000 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:

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Balance in Liabilities Account = Book Value of the Bonds + Interest Payable on Bonds

Book Value of Bonds = Face Value of Bonds Issued - Discount not Amortized

Face Value of Bonds = 2500000

Discount not Amortized = Total Discount - Discount Amortized on January 1 - Discount Amortized on July 1 = (2500000 - 2260000) - 8000 - 8000 = 224000

Book Value of Bonds = 2500000 - 224000 = 2276000

+

Interest Payable = 2500000*6/12*5% = 62500

Total Value = 2276000 + 62500 = 2338500

Answer is 2338500 (Option A)

Thanks.

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