On January 1, Martinez Inc. issued $5,000,000, 11% bonds for $5,325,000. 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 unamortized bond premium of:

Question

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First, we need to calculate the amount of bond premium amortized for the first year. 
Face value of bonds = $5,000,000 
Premium received = $5,325,000 - $5,000,000 = $325,000 
Effective interest rate = 10%

Interest expense for the year = $5,000,000 × 10% = $500,000 
Amortization of bond premium = $325,000 × 10% = $32,500 
Total bond interest expense for the first year = $500,000 + $32,500 = $532,500

Therefore, at the end of the first year, the unamortized bond premium will be: 
Unamortized bond premium = Premium received - Amortization of bond premium 
Unamortized bond premium = $325,000 - $32,500 = $292,500 
However, since we are using the effective-interest method, we need to adjust the unamortized bond premium based on the difference between the actual interest paid and the interest expense recorded for the year.

Actual interest paid = $500,000 
Interest expense for the year = $532,500 
Difference = $32,500

Since the actual interest paid is less than the interest expense recorded, we need to reduce the unamortized bond premium by the difference of $32,500.

Final unamortized bond premium = $292,500 - $32,500 = $260,000

But, we need to remember that the question is asking for the unamortized bond premium and not the total bond premium received. Therefore, we need to subtract the amortized bond premium from the total bond premium received.

Amortized bond premium for the first year = $32,500 
Unamortized bond premium at the end of the first year = Premium received - Amortized bond premium + Difference in interest paid and interest expense 
Unamortized bond premium at the end of the first year = $325,000 - $32,500 + $32,500 = $325,000 - $0 = $325,000 
Therefore, the answer is B) $307,500, which is the unamortized bond premium at the end of the first year.