On January 1, Patterson Inc.issued $5,000,000, 9% bonds for $4,695,000.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 should report bonds payable of

Question

Quizplus · Accepted Answer

Using the effective-interest method, the bond discount is amortized over the life of the bond. 
For the first year, the effective interest expense is calculated as follows: 
Carrying value of bond = $4,695,000 (original issue price) + $0 (amortization of discount in the first year) = $4,695,000 
Effective interest = 10% (market rate) x $4,695,000 (carrying value) = $469,500 
Interest payment = $5,000,000 (face value) x 9% (stated rate) = $450,000

Therefore, the amortization of the bond discount for the first year is $469,500 - $450,000 = $19,500. 
The carrying value of the bond after the first year is $4,695,000 + $19,500 = $4,714,500. 
Thus, the correct answer is B, bonds payable should be reported as $4,714,500 at the end of the first year.