a bond with a face value of $100000 is sold on January 1. The bond as a stated interest rate of 10% and matures in 10 years. Market rate on interest is 10% and increased to 11% on December 31. What amount should be reported on December 31 as bond liability
To calculate the amount that should be reported on December 31 as a bond liability, we need to consider the present value of the bond's future cash flows using the market interest rate as of December 31.
First, we need to calculate the present value factor for the bond using a 10-year maturity and a market interest rate of 10%. The present value factor can be calculated using the formula:
PV Factor = 1 / (1 + r)^n
Where r is the market interest rate and n is the number of periods (in this case, 10 years). Plugging in the values, we have:
PV Factor = 1 / (1 + 0.10)^10
= 1 / (1.10)^10
≈ 0.3855
Next, we calculate the present value of the bond's future cash flows by multiplying the face value ($100,000) by the present value factor:
Present Value = Face Value x PV Factor
= $100,000 x 0.3855
= $38,550
Therefore, the amount that should be reported on December 31 as a bond liability is approximately $38,550.