Question

Brazen Inc. sells bonds with a face value of $1,000,000 and a contractual interest rate of 10% for $1,200,000. The bonds will mature in 10 years. Using the straight-line method of amortization, how much interest expense will be recognized in year 1?

Answer 1

$80,000

Step-by-step explanation:

Given:

Face value = $1,000,000

Contractual interest rate = 10% for $1,200,000

Maturity period = 10 years

Now,

contractual interest = 10% × Face value

= 10% × $1,000,000

= $100,000

The annual bond amortization = ( $1,200,000 - $1,000,000 ) ÷ 10

= $20,000

The annual interest expense = Face value - annual bond amortization

= $100,000 - $20,000

= $80,000