On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months. The company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

Question

Quizplus · Accepted Answer

The bond premium is being amortized at a rate of $10,000 every six months. So, the total bond premium to be amortized over the life of the bond is $10,000 x 2 x 10 = $200,000. The total liabilities associated with the bond issue on December 31, Year 1 is $3,200,000 + $200,000 = $3,400,000. However, the company has already made one semi-annual interest payment of $3,500,000 x 7% x 6/12 = $105,000. So, the total liabilities associated with the bond issue on December 31, Year 1 is $3,400,000 - $105,000 = $3,342,500.

On January 1 of Year 1, Drum Line Airways Issued