Auerbach Inc. issued 8% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $225 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 $255,366,000, what would the company report for its net bond liability balance at December 31, 2021, rounded up to the nearest thousand?

Auerbach Inc.

For its net bond liability balance at December 31, 2021, the company would report:

= $253,482 (in thousands).

Explanation:

a) Data and Calculations:

Face value of bonds = $225,000,000

Price of bonds =           $255,366,000

Bonds premiums =         $30,366,000 ($255,366,000 - $225,000,000)

Maturity date = September 30, 2031

Maturity period = 10 years

Coupon interest rate = 8%

Effective interest rate = 10%

Payment of interest = Semiannually on March 31 and September 30:

December 31, 2021:

Interest expense = $6,384,150 ($255,366,000 * 10% * 3/12)

Cash payment =    $4,500,000 ($225,000,000 * 8% * 3/12)

Premium amortization = $1,884,150

Fair value of bonds payable = $253,481,850 ($255,366,000 - $1,884,150)

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