On January 1, Martinez Inc. issued $3,000,000, 9% bonds for $2,817,000. 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 discount. At the end of the first year, Martinez should report unamortized bond discount of:

Question

Quizplus · Accepted Answer

The effective-interest method requires using the market rate at the time the bonds were issued to calculate the interest expense each year and to amortize the bond discount or premium. 
The annual interest payment on the $3,000,000 bond is ($3,000,000 x 9%) = $270,000.
The interest expense for the first year is ($2,817,000 x 10%) = $281,700.
The bond discount amortization for the first year is ($281,700 - $270,000) = $11,700.
Therefore, the unamortized bond discount at the end of the first year is ($30,000,000 - $11,700) = $171,300.