Question

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $370 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $314,955,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2022?

Answer 1

Q1: In the books of Auebach Inc.

Answer : Net bond liability balance after first interest payment on March 31,2022 is $317,003,650

Calculations:

	Cash paid	Interest expense	Increase in Carrying value	Carrying value
Oct 01,2021				$314,955,000
Mar 31,2022	$7,400,000	$9,448,650	$2,048,650	$317,003,650

Cash paid = Face value x Interest rate

=370,000,000 x 4% x 6/12

= $7,400,000

Interest expense = Preceding Carrying value x Effective interest rate

=314,955,000 x 6% x 6/12

=$9,448,650

Increase in carrying value = Interest expense - cash paid

=$9,448,650-$7,400,000

=$2,048,650

Carrying value = Preceding carrying value + Increase in carrying value

Hence,  Net bond liability balance (Carrying value) after first interest payment on March 31,2022 is $317,003,650

Q2: In the books of Moran Corporation

Answer: Reduction in bonds discount for the six months ended December 31,2021 is $53,000

Calculations:

Cash paid = Face value x interest rate

=$12,500,000 x 10% x 6/12

=$625,000

Interest expense = Carrying value x Effective interest rate

=$11,300,000 x 12% x 6/12

=$678,000

Reduction in bonds discount = Interest expense - Cash paid

=$678,000 - $625,000

=$53,000

Hence, Reduction in bonds discount for the six months ended December 31,2021 is $ 53,000