On January 1 Borge Inc. issued $3000000 8% bonds for $2817000. The market rate of interest for these bonds is 9%. Interest is payable annually on December 31. Borge uses the effective-interest method of amortizing bond discount. At the end of the first year Borge should report unamortized bond discount of:

A) $164700.
B) $169470.
C) $157647.
D) $153000.

Question

Makayalla Farino · Accepted Answer

Final Answer : B, Explanation :  The unamortized bond discount at the end of the first year is calculated by first determining the interest expense using the market rate of interest (9%) on the carrying amount of the bonds at issuance, then subtracting the actual cash paid for interest based on the bond's stated rate (8%). The difference between the interest expense and the cash interest paid is the amount of discount amortized during the year. The initial discount is the difference between the face value ($3,000,000) and the issued price ($2,817,000), which is $183,000. The interest expense for the first year is 9% of $2,817,000 = $253,530. The cash interest paid is 8% of $3,000,000 = $240,000. The amortized discount for the first year is $253,530 - $240,000 = $13,530. Therefore, the unamortized bond discount at the end of the first year is $183,000 - $13,530 = $169,470.

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