On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,087 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:
A)$3,220,000.
B)$3,340,063.
C)$3,097,500.
D)$3,780,000.
E)$3,902,500.

Question

Quizplus · Accepted Answer

First, we calculate the total interest paid per year on the bond: $3,500,000 x 7% = $245,000
Then, we calculate the present value of the bond: $3,197,389 = PVIFA(8%, 2 periods) x $245,000 + $3,500,000 x PVIF(8%,2 periods)
Solving for PVIFA and PVIF using a financial calculator or table, we get:
PVIFA = 0.89966
PVIF = 0.82270
Therefore, PVIFA x $245,000 = $220,102.70 is the amount of interest expense recognized every six months
Since the bond premium is being amortized at a rate of $10,087 every six months, we subtract this from the interest expense to get the amount of premium amortization: $220,102.70 - $10,087 = $210,015.70 every six months
So, the total premium amortization for Year 1 is $210,015.70 x 2 = $420,031.40
The balance sheet should reflect the carrying amount of the bond, which is the face value of $3,500,000 plus the unamortized premium at the end of Year 1, which is $420,031.40 - $10,087 = $409,944.40. Therefore, the total liabilities associated with the bond issue should be $3,500,000 + $409,944.40 = $3,909,944.40, and the closest answer choice is B) $3,340,063.

On January 1 of Year 1,Congo Express Airways Issued $3,500,000