211. On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,685,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Greene uses the effective-interest method of amortizing bond discount. At the end of the first year, Greene should report unamortized bond discount of

Question

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The bond discount is calculated as the difference between the face value of the bonds ($5,000,000) and the amount of cash received from the issuance of the bonds ($4,685,000), which is $315,000.

Using the effective-interest method, we need to calculate the interest expense and the amortization of the bond discount for the first year. The interest expense is calculated as the carrying value of the bonds at the beginning of the year ($4,685,000) multiplied by the market rate of interest (10%), which is $468,500.

The coupon payment on December 31 is $450,000 (9% of face value), which is less than the interest expense. Therefore, the carrying value of the bonds at the end of the year will be higher than at the beginning of the year, because the excess interest expense of $18,500 will reduce the bond discount.

The amortization of the bond discount is the difference between the interest expense and the coupon payment:

Amortization = Interest expense – Coupon payment
= $468,500 - $450,000
= $18,500

The carrying value of the bonds at the end of the first year is therefore $4,703,500 ($4,685,000 + $18,500). The unamortized bond discount is the difference between the face value and the carrying value:

Unamortized bond discount = Face value – Carrying value
= $5,000,000 - $4,703,500
= $296,500

Therefore, at the end of the first year, Greene should report unamortized bond discount of $296,500, which is option B.