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Chapter 14: Q5ISTQ (page 772)

On January 1, Martinez Inc. issued \(3,000,000, 11% bonds for \)3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of:

(a) \(3,185,130. (c) \)3,173,550.

(b) \(3,184,500. (d) \)3,165,000.

Short Answer

Expert verified

The correct option is(b) $3,184,500.

Step by step solution

01

Definition of Discount Amortization

The process under which the business entity assigns the discount to interest payment made each year is known as discount amortization. Under this method, the unamortized discount reduces, and the carrying value of the bonds increases after each period.

02

Explanation of correct option

The business entity will report a bond payable equal to $3,184,500.

Working note:

Date

Cash interest at the stated rate on bond payable (11%)

Interest expenses at market rate on carrying value (10%)

Premium amortized

Unamortized premium

Bond payable

Carrying value

1 Jan

$195,000

$3,000,000

$3,195,000

31 Dec

$330,000

$319,500

$10,500

$184,500

$3,000,000

$3,184,500

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Most popular questions from this chapter

When is the stated interest rate of a debt instrument presumed to be fair?

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

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