Question

On January​ 1, Year​ 1, assume Smart Touch Learning issued​ 10-year, \$100,000 bonds at 95% with...

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 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

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