Question

nuary 1, Campanella Inc. issued $4,000,000, 8% bonds for $3,756,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Campanella uses the effective-interest method of amortizing bond discount. At the end of the first year, Campanella should report unamortized bond discount of

Answer 1

$188,400

Step-by-step explanation:

Data provided in the question:

Value Bonds issued = $4,000,000

Amount for which bonds issued = $3,756,000

Thus,

Bond discount at the time of issue = $4,000,000 - $3,756,000

= $244,000

Interest = 8%

Interest payable = Value Bonds issued × Interest

= $4,000,000 × 8%

= $320,000

Market rate of interest = 10%

Therefore,

Interest expense = $3,756,000 × 10%

= $375,600

Thus,

Discount amortized = Interest expense - Interest payable

= $375,600 - $320,000

= $55,600

Therefore,

At the end of the first year, Campanella should report unamortized bond discount

= Bond discount at the time of issue - Discount amortized

= $244,000 - $55,600

= $188,400