Question

Auerbach Inc. issued 8% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $225 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 10%. Assuming that Auerbach issued the bonds for $255,366,000, what would the company report for its net bond liability balance at December 31, 2021, rounded up to the nearest thousand?

Answer 1

Auerbach Inc.

For its net bond liability balance at December 31, 2021, the company would report:

= $253,482 (in thousands).

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds = $225,000,000

Price of bonds = $255,366,000

Bonds premiums = $30,366,000 ($255,366,000 - $225,000,000)

Maturity date = September 30, 2031

Maturity period = 10 years

Coupon interest rate = 8%

Effective interest rate = 10%

Payment of interest = Semiannually on March 31 and September 30:

December 31, 2021:

Interest expense = $6,384,150 ($255,366,000 * 10% * 3/12)

Cash payment = $4,500,000 ($225,000,000 * 8% * 3/12)

Premium amortization = $1,884,150

Fair value of bonds payable = $253,481,850 ($255,366,000 - $1,884,150)