Question

Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2019. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2018, rounded up to the nearest thousand? Multiple Choice $252,369,000. $256,369,000. C. $256,200,000. Correct $257,030,070.

I THINK THE ANSWER IS C.256,200,000 NOT 257,030,070. WOULD YOU PLEASE CHECK IT AGAIN?

Answer 1

Interest payable on the bonds for the three months October 1 to December 31 = $300,000,000 x 4% x 3/12 = $3,000,000

Interest expense on the bonds for the three months October 1 to December 31 = $255,369,000 x 6% x 3/12 = $3,830,535

Therefore,

Discount to be amortized for the three months = $3,830,535 - $3,000,000 = $830,535

And,

The net bond liability on December 31, 2018 = Issue price + Discount amortized = $255,369,000 + $830,535 = $256199535

The correct answer according to above calculation is $256,199,535 which is closest to option C that is $256,200,000. Therefore, option C should be the correct choice.