Question

Chism Corporation issued $10 million face amount of bonds on January 1, 2016. The bonds have a 10-year term and pay interest semiannually. The following is a partial bond amortization schedule for the bonds.

Payment Cash Effective Decrease in Outstanding
Interest Balance Balance
11,487,747
1 400,000 344,632 55,368 11,432,379
2 400,000 342,971 57,029 11,375,350
3 400,000 341,261 58,739 11,316,611
4 400,000
What is the interest expense on the bonds in 2017?
1) $119,241
2) $342,961
3) $680,759
4) $800,000

Answer 1

The interest expense on the bonds in 2017 is $171,136.

Step-by-step explanation:

The interest expense on the bonds in 2017 can be calculated by subtracting the decrease in outstanding balance from the payment made. In the given bond amortization schedule, the decrease in outstanding balance is shown as follows:

• Decrease in Outstanding Balance in Year 1: $55,368
• Decrease in Outstanding Balance in Year 2: $57,029
• Decrease in Outstanding Balance in Year 3: $58,739

Since the bonds pay interest semiannually, we need to consider both payments made in 2017. Adding these payments gives us $55,368 + $57,029 + $58,739 = $171,136. Therefore, the interest expense on the bonds in 2017 is $171,136.