Question

On January​ 1, Year​ 1, assume Smart Touch Learning issued​ 10-year, $100,000 bonds at 95% with an interest rate of 6% paid semi-annually. Using the​ straight-line amortization​ method, what is the amount of interest expense recorded each interest​ period?

A. 3,000

B.3,250

C. 6,000

D. 6,500

Answer 1

Answer is (b) $ 3,250

Interest expense would comprise of two parts as under:

1. Interest Payable

Bond Amount = $ 100,000

Interest Rate = 6%

Semiannual interest rate = 6% / 2 = 3%

Interest Payable = $ 100,000 X 3% = $ 3,000

2. Amortization of Discount

Total Discount = $ 5,000 (100,000 bonds issued at 95% which emans discount is 5% i.e. $ 100,000 X 5%)

Life of Bond = 10 years

No. of half years in Bond Life = 10 years X 2 = 20 half years

Per half year discount = $ 5,000 / 20 half years = $ 250

Total Interest Expense = Interest Payable + Discount amortized on Bond = $ 3,000 + $ 250 = $ 3,250