Question

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2017?

$585,000

$1,170,000

$1,176,373

$1,176,249

Answer 1

• Interest expense to be recognised in 2017 will be equal to the 2 semi annual Interest expense.
• Interest Expense = Carrying Value x Yield Interest annual x 6/12
• Interest expense on June 30 2017

= 14703108 x 8% x 6/12 = $ 588,124

• Discount amortised on June 30 = 588124 – (15000000 x 7.8% x 6/12] = 588124 – 585000 = $ 3124
• Carrying Value on 31 Dec = 14703108 + 3124 = $ 14,706,232
• Interest expense on Dec 31 2017

=14706232 x 8% x 6/12 = $ 588,249

• Total Interest expense = 588124 + 588249 = $ 1,176,373
• Correct Answer = Option #3 $ 1,176,373