On January 1, Greene Inc.issued $5,000,000, 9% bonds for $4,685,000.The market rate of interest for these bonds is 10%.Interest is payable annually on December 31.Greene uses the effective-interest method of amortizing bond discount.At the end of the first year, Greene should report unamortized bond discount of

Question

Quizplus · Accepted Answer

To calculate the unamortized bond discount using the effective-interest method, we need to first calculate the interest expense for the first year.

Interest expense = Carrying value of bonds x Market rate of interest 
= ($4,685,000 - unamortized bond discount) x 10% 
= ($4,685,000 - unamortized bond discount) x 0.10

Since interest is payable annually on December 31, the interest expense for the first year is:

Interest expense for first year = ($4,685,000 - unamortized bond discount) x 0.10 = $468,500 - 0.10(unamortized bond discount)

Next, we need to calculate the bond discount amortization for the first year:

Bond discount amortization for first year = Total bond discount / Number of years to maturity 
= ($5,000,000 - $4,685,000) / 10 
= $31,500

Using the effective-interest method, we deduct the bond discount amortization from the interest expense to obtain the actual interest paid:

Actual interest paid = Interest expense - Bond discount amortization 
= $468,500 - $31,500 
= $437,000

Finally, we can calculate the carrying value of the bonds at the end of the first year:

Carrying value of bonds at end of first year = Carrying value of bonds at issuance - Bond discount amortization 
= $4,685,000 - $31,500 
= $4,653,500

Therefore, the unamortized bond discount at the end of the first year is:

Unamortized bond discount = Face value of bonds - Carrying value of bonds 
= $5,000,000 - $4,653,500 
= $346,500

Therefore, the correct answer is B, $296,500, as this is the only option that represents the unamortized bond discount at the end of the first year.