Question

On April 1, year 1, Cricket Corporation issues $52 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.

Interest expense on this bond issue reported in Cricket's Year 1, income statement is:

• $2,080,000.

• $4,680,000.

• $6,240,000.

• $4,160,000.

Answer 1

Par value of bonds = $52,000,000

Interest rate = 12%

Bonds were issued on April 1, year 1.

Interest on the bonds is payable semiannually on April 1 and October 1.

Interest expense for year 1 will be calculated for 9 months (From April 1 to December 31)

Interest expense for year 1 = Par value of bonds x Interest rate x 9/12

= 52,000,000 x 12% x 9/12

= $4,680,000

Second option is correct.

Interest expense on this bond issue reported in Cricket's Year 1, income statement is: $4,680,000