205. On January 1, Patterson Inc. issued $6,000,000, 9% bonds for $5,634,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson's unamortized bond discount is

Question

Quizplus · Accepted Answer

To calculate the unamortized bond discount at the end of the first year, we need to first calculate the amount of bond discount amortized in the first year.

The bond discount is $6,000,000 - $5,634,000 = $366,000.

Using the effective-interest method, we calculate the interest expense for the first year as follows:
Interest expense = carrying value of the bonds at the beginning of the year x market interest rate
Carrying value of the bonds at the beginning of the year = issue price - unamortized discount = $5,634,000 - $0 = $5,634,000
Market interest rate = 10%
Interest expense = $5,634,000 x 10% = $563,400

The actual interest paid for the first year is $6,000,000 x 9% = $540,000.

Therefore, the amount of bond discount amortized in the first year is $563,400 - $540,000 = $23,400.

The unamortized bond discount at the end of the first year is the original bond discount of $366,000 minus the amount of discount amortized in the first year of $23,400, or $342,600.

Therefore, the answer is B.