Question

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Payment Cash Effective Interest Decrease in Balance Outstanding Balance 8,640,967 1 300,000 345,639 45,639 8,686,606 2 300,000 347,464 47,464 8,734,070 3 300,000 349,363 49,363 8,783,433 4 300,000 What is the interest expense on the bonds for the year ended December 31, 2019? Multiple Choice $100,700. $600,000. $700,700. $347,464.

Answer 1

$600,000.

The interest rate of the bond issued it's 6%, so the company always pays the same amount of interest, $300,000 (3%) each period because it's semiannually, total year of $600,000.

The difference lies on the rate interest accepted by the market, the information indicates that the market requires a higher interest rate to lend the money to the company at this moment.

Step-by-step explanation:

It the moment of the bond issued the company register:

Debit $8,640,967 Cash

Debit $1,359,033 Discount on Bonds Payable

Credit $10,000,000 Bonds Payable

At the moment of record the first interest payment

Debit $345,639 Bond Interest Expense

Credit $45,639 Discount on Bond Payable

Credit $300,000 Cash

At the moment of record the second interest payment

Debit $347,464 Bond Interest Expense

Credit $47,464 Discount on Bond Payable

Credit $300,000 Cash