Question

On January 1, Martinez Inc. issued \(3,000,000, 11% bonds for \)3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of:

(a) \(3,185,130. (c) \)3,173,550.

(b) \(3,184,500. (d) \)3,165,000.

Short answer

The correct option is(b) $3,184,500.

Step-by-step solution

Definition of Discount Amortization

The process under which the business entity assigns the discount to interest payment made each year is known as discount amortization. Under this method, the unamortized discount reduces, and the carrying value of the bonds increases after each period.

Explanation of correct option

The business entity will report a bond payable equal to $3,184,500.

Working note:

Date	Cash interest at the stated rate on bond payable (11%)	Interest expenses at market rate on carrying value (10%)	Premium amortized	Unamortized premium	Bond payable	Carrying value
1 Jan				$195,000	$3,000,000	$3,195,000
31 Dec	$330,000	$319,500	$10,500	$184,500	$3,000,000	$3,184,500