Question

Victor Company issued bonds with a $450,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year. The amount of interest expense appearing on the December 31, Year 3 income statement would be:

Answer 1

Total interest expense: 31,500

Step-by-step explanation:

As the company used straight line method the interest on all the years are the same.

proceeds 427,500 (450,000 x 95/100)

face value (450,000)

discount on bonds payable (22,500)

This will be depreciate over 5 years:

22,500 / 5 = 4,500

Then, the interest expense will be the amortization of the discount and the cash proceeds:

450,000 x 6% = 27,000

Total interest expense: 31,500