Question

A company issues $15100000, 9.8%, 20-year bonds to yield 10% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14840898. Using effective-interest amortization, how much interest expense will be recognized in 2017? $1484196 $1484072 $739900 $1479800

Answer 1

Interest Expense to be recognized in 2017 is $1,484,197

Interest Expense for Jan-Jun = $14,840,898* 10%/2 = $742,045

Amortization of Discount= ($14,840,898 * 10%/2) - ($15,100,000* 9.8%/2)

= $742,045 - $739,900 = $2,145

Carry Amount of Bond on June 30 = $14,840,898 + ($14,840,898* 10%/2) - ($15,100,000* 9.8%/2)

= $14,840,898 + $742,045- $739,900 = $14,843,043

Interest Expense for Jun-Dec= [$14,840,898 + ($14,840,898 *10%/2) -($15,100,000*9.8%/2)]*10% /2

= ($14,840,898 + $742,045 - $739,900) *10% /2

= $14,843,043  *10% /2 = $742,151

Interest Expense for 2017 = $742,045 + $742,152 = $1,484,196

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