On January 1, 2020, Neeson Ltd. issued $ 2,000,000, 5% bonds, which mature on January 1, 2027. The bonds were issued for $ 2,120,045 to yield 4%. Neeson uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2020, the adjusted balance in the Bonds Payable account should be

Question

Quizplus · Accepted Answer

Using the effective-interest method, the bond premium is amortized over the life of the bond. The premium on the bond is the difference between the issue price and the face value, which is $120,045. The annual amortization of the premium is calculated as: 
Premium amortization = Bond premium / Number of interest periods 
= $120,045 / 7 years 
= $17,149

Therefore, the total interest expense for the first year is: 
Total interest expense = Face value of bonds x Interest rate 
= $2,000,000 x 0.05 
= $100,000

The annual interest payment is $100,000, so the interest expense for the first year is $100,000 and the premium amortization is $17,149. Therefore, the adjusted balance in the Bonds Payable account at December 31, 2020, is: 
Adjusted balance = Face value of bonds + Premium - Premium amortization - Interest expense 
= $2,000,000 + $120,045 - $17,149 - $100,000 
= $2,104,847

Therefore, the correct answer is B) $ 2,104,847.