On January 1, 2017, Varden Ltd.issued $4,000,000, 10% bonds, which mature on January 1, 2027.The bonds were issued for $4,540,000 to yield 8%.Varden uses the effective-interest method of amortizing bond premium.Interest is payable annually on December 31.At December 31, 2017, the adjusted balance in the Bonds Payable account should be

Question

Quizplus · Accepted Answer

Using the effective-interest method, the annual interest expense is calculated as follows:
Year 1: $4,540,000 x 8% = $363,200
The premium amortization for Year 1 is calculated as follows:
Year 1: ($4,540,000 x 8%) - $363,200 = $129,600
The adjusted balance in the Bonds Payable account at December 31, 2017 is calculated as follows:
$4,000,000 (face value) + $129,600 (premium amortization) = $4,129,600
Therefore, the correct answer is B) $4,503,200.