Question

On January 1, Jorge Inc. issued $3,000,000, 8% bonds for $2,817,000. The market rate of interest for these bonds is 9%. Interest is payable annually on December 31. Jorge uses the effective-interest method of amortizing bond discount. At the end of the first year, Jorge should report unamortized bond discount of:

Answer 1

Answer: $169470

Explanation: Firstly, we'll calculate the discount on bond which will be:

= Issue Price - Par Value

= $3,000,000 - $2,817,000

= $183,000

Then, the interest payable will be:

= Coupon Rate × Bond ParValue

= $3,000,000 × 8%

= $3,000,000 × 0.08

= $240,000

We will calculate the interest expense as:

= Issue Value × Market Rate

= $2,817,000 × 9%

= $253,530

Then, the amortized amount for Year 1 will be:

= Interest Expense - Interest Payable

= $253,530 - $240,000

= $13,530

Therefore, the unamoritzed amount of bond discount will be:

= $183,000 - $13,530

= $169,470