Question

\( \$ 100,000 \) of five - year bonds are sold for \( \$ 99,000 \) on the issue date. Interest of \( \$ 4,000 \) is paid each year until the bonds are repaid. What is the total interest expense to the A) $20,000 B) $21,000 C) $19,000 D) $22,000

Answer 1

The total interest expense for the bond issued at a discount is calculated by adding the total annual interest payments over the bond term to the discount on the bond price. In this case, the total interest expense is $21,000.

So the correct answer is B.

Step-by-step explanation:

The subject question is related to the accounting and finance of bonds, where the total interest expense on a sold bond is being calculated. The $100,000 worth of five-year bonds are sold at a discount, for $99,000, and pay an annual interest of $4,000.

To determine the total interest expense, we add the annual interest payments to the discount at which the bonds were sold (since the discount represents an additional cost to the issuer).

Here's the calculation:

Total interest expense = (Annual interest payment x Number of years) + Bond discount

Total interest expense = ($4,000 x 5) + ($100,000 - $99,000) = $20,000 + $1,000

Total interest expense = $21,000.

So the correct answer is B) $21,000.