Question

On January 1, Patterson Inc. issued $4,000,000, 9% bonds for $3,756,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of:

1) $228,400
2) $204,000
3) $219,600
4) $206,440

Answer 1

Patterson Inc. should report an unamortized bond discount of $228,400 at the end of the first year using the effective-interest method of amortization.

Step-by-step explanation:

The student's question pertains to the amount of unamortized bond discount Patterson Inc. should report at the end of the first year, given a bond issue at a discount using the effective-interest method of amortization. As the bond was issued for $3,756,000 with a face value of $4,000,000, the initial bond discount is $244,000 ($4,000,000 - $3,756,000).

The interest expense for the first year using the market interest rate (10%) is $375,600 (10% of $3,756,000), while the actual interest paid is $360,000 (9% of $4,000,000). To determine the unamortized bond discount at the end of the year, the initial bond discount is adjusted by the amortized amount in the first year, which is the difference between the interest expense and the interest paid, amounting to $15,600 ($375,600 - $360,000).

The unamortized bond discount is then $228,400 ($244,000 - $15,600).

Therefore, the correct answer is: 1) $228,400.