Question

Auerbach Inc. issued 8% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $800 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 10%.

Assuming that Auerbach issued the bonds for $700,296,000, what would the company report for its net bond liability balance at December 31, 2021, rounded up to the nearest thousand? (Do not round intermediate calculations.)

• $799,000,000.

• $684,296,000.

• $701,803,000.

• $716,296,000.

Answer 1

Net bond liability balance at December 31, 2021 = Beginning liability + Accrued Interest for 3 months - Interest payable for 3 months

Beginning liability = $700,296,000

Accrued Interest for 3 months = ($700,296,000 * 10% * 3/12)

= $17,507,400

Interest payable for 3 months = ($800,000,000 * 8% * 3/12)

= $16,000,000

Net bond liability balance at December 31, 2021 = $700,296,000 + $17,507,400 - $16,000,000

= $701,803,400

$701,803,000 (rounded to thousand dollar)