Final answer:
The liability balance reported on the Benson Company's balance sheet as of December 31, Year One, equals the remaining principal of $300,000 after paying $100,000, plus the interest payable of $12,000, resulting in a total of $312,000.
Step-by-step explanation:
To calculate the liability balance reported on the Benson Company's balance sheet as of December 31, Year One, we will undertake the following steps. Since Benson Company issues a $400,000 serial bond and will repay $100,000 each year, the balance after one year will be reduced to $300,000. On this balance, the company will pay interest at a 4% rate which amounts to $12,000 ($300,000 × 4%). Therefore, the end of the year liability balance is the remaining principal of $300,000 plus the interest payable of $12,000.
The initial issuance of the bond at $373,740 does not affect the liability balance reported at the end of Year One because the bond was issued at a discount to earn an effective interest rate of 7%, and the interest and principal repayment schedule remains unaffected by the discounted issue price. Hence, we do not need to consider the effective interest rate or issue price in the liability balance as of December 31, Year One.
By summing the remaining principal ($300,000) and the interest payable ($12,000), we find that the liability balance reported as of December 31, Year One would be $312,000.