Question

A company issued 5-year, 7% bonds with a par value of $100,000. The company received $97,947 for the bonds. Using the straight-line method, the amount of interest expense for

a)3705.3

b)3294.7

c)7000.0

d)7410.6

Answer 1

Answer:

On the issue of 5-year, 7% bonds with a par value of $100,000, the company received $97,947 from the bondholders but the company needs to pay $100,000 on the date of maturity of bonds. The discount of $2,053 is treated as an additional expense over the life of the bond.

Accordingly, the amount of interest expense using the straight-line method is as follows:

Interest Expense = {($100,000 x 7%) + ($100,000- $97,947) / 5}

= ($7,000 + $410.6)

= $7410.6

Accordingly, option (d) i.e. $7410.6 is the correct answer.