Question

On January 1 of Year 1, Congo Express Airways issued $3,240,000 of 8% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $2,980,000 and the market rate of interest for similar bonds is 9%. The bond premium or discount is being amortized at a rate of $8,667 every six months. After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

a.$3,482,666.


b.$2,867,734.


c.$3,126,934.


d.$2,997,334.


e.$3,612,266.

Answer 1

Answer:

d.$2,997,334.

Explanation:

bond's carrying value = bond's issue price + (amortized discount x 2) = $2,980,000 + ($8,667 x 2) = $2,980,000 + $17,334 = $2,997,334

the journal entry when the bonds were issued:

January 1, 202x, bonds issued at a discount

Dr Cash 2,980,000

Dr Discount on bonds payable 260,000

    Cr Bonds payable 3,240,000

Discount on bonds playable is a contra liability account that decreases the carrying value of bonds payable. As discount is amortized, the carrying value of bonds payable increases