On January 1, 2013, $1,000,000, 5-year, 5% bonds, were issued for $957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. What would be the amount of discount amortized on January 1, 2014?

Question

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The discount on the bonds is the difference between the face value ($1,000,000) and the issued price ($957,349), which is $42,651. The discount is amortized over the life of the bond using the effective interest method. The interest expense for the first year is calculated on the carrying amount of the bond at the beginning of the period. The carrying amount at issuance is $957,349, and the effective interest rate is 6% per annum, but since interest is paid semi-annually, the rate per period is 3%. Thus, for the first six months, the interest expense is $957,349 * 3% = $28,720.47. The actual cash paid for interest is $1,000,000 * 5% / 2 = $25,000 (since it's a 5% bond paying semi-annually). The difference between the interest expense and the cash paid is the amount of discount amortized in the first six months, which is $28,720.47 - $25,000 = $3,720.47. This process is repeated for the next six months, but the carrying amount is now $957,349 + $3,720.47 = $961,069.47. The interest expense for the next six months is $961,069.47 * 3% = $28,832.08, and the cash paid remains $25,000. The difference, which is the amortization for the next six months, is $28,832.08 - $25,000 = $3,832.08. Therefore, the total discount amortized in the first year is $3,720.47 + $3,832.08 = $7,552.55. However, none of the options exactly match this calculation, suggesting a mistake in my explanation or a misunderstanding of the question's requirements. Given the options, the closest to the correct process of calculation is C) $3,832, which seems to represent the amortization for the second six-month period only, not the entire year. This indicates a misunderstanding in the question's phrasing or a mistake in the calculation process.

On January 1, 2013, $1,000,000, 5-Year, 5% Bonds, Were Issued