Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information:The total amount of liabilities shown on Jones's December 31, Year 2 balance sheet would be: A) $191,600. B) $194,000. C) $196,400. D) $195,200.

Question

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To calculate the total amount of liabilities shown on Jones's December 31, Year 2 balance sheet, we need to find the carrying value of the bond as of that date.

The bonds were issued at 97, which means that Jones received 97% of the face value in cash. Therefore, the cash inflow at issuance was:

$200,000 x 97% = $194,000

The bond discount is the difference between the face value and the cash received:

$200,000 - $194,000 = $6,000

Since the bond discount is being amortized using the straight-line method, we need to calculate the annual amortization amount. The bond discount will be amortized over the life of the bond, which is 5 years. Therefore, the annual amortization amount is:

$6,000 ÷ 5 years = $1,200 per year

At the end of Year 1, the carrying value of the bond was:

$194,000 - $1,200 = $192,800

At the end of Year 2, the carrying value of the bond will be:

$192,800 - $1,200 = $191,600

Therefore, the total amount of liabilities shown on Jones's December 31, Year 2 balance sheet would be $191,600.

Jones Company Issued Bonds with a $200,000 Face Value on January