Question

Auerbach Inc. issued 6% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $500 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2019. The effective interest rate established by the market was 8%.

Assuming that Auerbach issued the bonds for $432,045,000, what would the company report for its net bond liability balance at December 31, 2018, rounded up to the nearest thousand?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

в о Е Е G с Answer Net Bond Liability = Issue Price - discount amortised for 3 months on bonds = 432045000 + 1140900 = 433185900 = $ 433186000 (rounded off to nearest thousands) Thus the correct answer is $ 433,186,000 Calculation Bond amortisation from October 1 2018 to December 31, 2018 = Interest expense for 3 months - interest payable for 3 months = (432045000*8%*3/12) - (500000000*6%*3/12) = 8640900 - 7500000 = $ 1140900 8640900