207. On January 1, Martinez Inc. issued $4,000,000, 9% bonds for $3,756,000. 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 discount. At the end of the first year, Martinez's unamortized bond discount is

Question

Quizplus · Accepted Answer

To amortize the bond discount using the effective-interest method, we need to calculate the interest expense based on the carrying value of the bonds each year.

Here are the steps to calculate the unamortized bond discount:

1. Calculate the annual interest expense using the effective-interest method:
Interest expense = Carrying value of bonds x Market rate of interest = $3,756,000 x 10% = $375,600

2. Deduct the interest expense from the amount of interest paid:
Amortization of bond discount = Interest paid - Interest expense = $360,000 - $375,600 = -$15,600

3. Add the amortization amount to the previous year's unamortized bond discount:
Unamortized bond discount at the end of year 1 = Previous unamortized bond discount + Amortization of bond discount = $228,400 + (-$15,600) = $212,800

Therefore, the unamortized bond discount at the end of the first year is $228,400, option B is correct.