Question

A $100,000 10 year, 7% bond that pays interest semiannually on June 30 and December 31 is issued to yield 6.0% on January 1, 2020. The proceeds from the bond are $107,439. Using effective interest amortization, how much interest expense will be recognized in 2020?

a) $0

b) $7,000

c) $6,438

d) $6,000

Answer 1

BOND FACE VALUE	100000
BOND PREMIUM VALUE	107439
ON 30 JUNE
INTEREST EXPENSE	3223.17
	(107439*0.06*6/12)
INTEREST PAID	3000
	(100000*0.06*6/12)
AMORTIZATION	223.17
VALUE OF BOND ON 30 JUNE	107215.83
	(107439-223.17)
ON 31 DECEMBER
INTEREST EXPENSE	3216.4749
	(107215.83*0.06*6/12)
INTEREST PAID	3000
	(100000*0.06*6/12)
AMORTIZATION	216.4749
TOTAL INTEREST EXPENSE RECOGNIZED =	3000+3000+223.17+216.48
TOTAL INTEREST EXPENSE RECOGNIZED =	6439.65
SO OPTION C $ 6438 IS CORRECT ANSWER