Question

On January 1, 2021, XYZ issued $700,000, 5% bonds for $685,000, with market rate of 6%. The bonds pay interest on June 30 and December 31. How much is the interest expense on the bonds for the first interest payment on June 30, 2021?

a. 21,000

b. 42,000

c. 20,550

d. 41,100

Answer 1

Bond is issued at discount as the market value of bond ($685,000)< Face value($700,000)

So. the difference of $15,000 will be amortised using effective method. (Number of years has not been given so straight line method connot be used)

Market interest rate= 6%/2 =3% twice per year

Bond cash interest rate = 5% /2= 2.5% twice per year

Date	Interest Payment Face Value X Interest rate	Interest expense Book value in previous period X Market rate	Amortization of discount	Book value
Jan 1				$685,000
June 30	$17,500[$700,000*2.5%]	$20,550[$685,000*3%]	$3,050[$20,550-17,500]	$688,050[$685,000+3,050]

Interest expense would be $20,550

Answer C

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