Question

on january 1 of year 1, congo express airways issued $2,700,000 of 7% bonds that pay interest semiannually on january 1 and july 1. the bond issue price is $2,470,000 and the market rate of interest for similar bonds is 8%. the bond premium or discount is being amortized at a rate of $7,667 every six months. the amount of interest expense recognized by congo express airways on the bond issue in year 1 would be:

Answer 1

The interest expense recognized by Congo Express Airways on the bond issue in year 1 is the sum of semiannual cash interest payments and the amortization of the bond discount, resulting in $204,334 for the year.

Step-by-step explanation:

To calculate the interest expense recognized by Congo Express Airways on the bond issue in year 1, we need to consider both the stated interest payment and the amortization of the bond discount. Congo Express Airways issued $2,700,000 of 7% bonds that pay interest semiannually. This means that every six months, the company will pay interest of $94,500 (which is 7% of $2,700,000, divided by 2). However, the bonds were issued at a discount, the issue price being $2,470,000, which is less than the face value. The discount of $230,000 is being amortized at a rate of $7,667 every six months. Therefore, the interest expense for each six-month period is the sum of the cash interest payment and the discount amortization, totaling $102,167 ($94,500 + $7,667).

Since interest is paid semiannually, there will be two interest expenses recognized in year 1, totaling $204,334 ($102,167 × 2). This reflects the actual cost of borrowing considering the market rate of interest being different from the coupon rate on the bonds.