Question

On January 1, Martinez Inc. issued P3,000,000, 11% bonds for P3,195,000. 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:

Answer 1

Par value of bonds = P3,000,000

Issue price of bonds = P3,195,000

Premium on bonds payable = Issue price of bonds - Par value of bonds

= P3,195,000 - P3,000,000

= P195,000

Annual interest payment = Par value of bonds x Stated interest rate

= 3,000,000 x 11%

= P330,000

Interest expense for first year = Carrying value of bonds at the beginning of the first year x Market interest rate

= 3,195,000 x 10%

= P319,500

Bond Premium amortized in first year = Annual interest payment - Interest expense for first year

= P330,000 - P319,500

= P10,500

Carrying value of bonds at the end of the first year = Carrying value of bonds at the beginning of the first year - Bond Premium amortized in first year

= 3,195,000 - 10,500

= P3,184,500

At the end of the first year, Martinez should report bonds payable of:P3,184,500