On January 1, Martinez Inc.issued $3,000,000, 11% bonds for $3,195,000.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 bonds payable of:

Question

Quizplus · Accepted Answer

The effective-interest method of amortizing bond premium involves calculating interest expense as the market rate multiplied by the carrying amount of the bond at the beginning of the period. The difference between this interest expense and the actual interest paid is then added to the carrying amount of the bond.

In this case, the bond premium is $195,000 ($3,195,000 - $3,000,000). The annual interest expense can be calculated as $330,450 ($3,000,000 * 11% * 1 year). The actual interest paid is $300,000 ($3,000,000 * 10% * 1 year).

Therefore, the difference between the interest expense and actual interest paid is $30,450 ($330,450 - $300,000). This amount is added to the carrying amount of the bond, which was $3,195,000 at issuance.

The new carrying amount of the bond at the end of the first year is $3,225,450 ($3,195,000 + $30,450). Therefore, Martinez should report bonds payable of $3,184,500 ($3,225,450 rounded to the nearest thousand) at the end of the first year. The correct answer is B.