Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2011.Interest is paid on July 1 and January 1.The proceeds from the bonds are $9,604,145.The balance reported in the bonds payable account on the December 31, 2011 statement of financial position?

Question

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- The bonds were issued for €10,000,000 but the proceeds were only $9,604,145, meaning that the company incurred some expenses related to the issuance of the bonds (such as underwriting fees, legal fees, etc.). 
- The bonds pay interest on July 1 and January 1, which means that by December 31, 2011, the company had already accrued 2/3 of the annual interest expense (since 6 months out of 12 had already passed). 
- To calculate the balance in the bonds payable account on December 31, 2011, we need to calculate how much of the bond principal had been repaid (if any) and how much interest had been accrued. 
- The annual interest expense is €10,000,000 x 7.8% = €780,000. Two-thirds of this is €520,000 (since 6 months out of 12 had passed). 
- The interest expense accrues at a rate of 8%, so the interest accrued on the bond principal from July 1, 2011 to December 31, 2011 is: €10,000,000 x 7.8% x 6/12 x 8/100 = €312,000. 
- The total increase in the bonds payable account from the time of issuance to December 31, 2011 is the sum of the bond principal, the accrued interest, and any expenses incurred: €10,000,000 - €9,604,145 + €520,000 + €312,000 = €227,855. 
- The balance in the bonds payable account on December 31, 2011 is therefore €9,604,145 + €227,855 = €9,832,000. 
- The closest answer to this amount is B)€9,804,156.

Franzia Company Issues €10,000,000, 7