Question

On March 1, 2024, a firm issued $200,000 of 9% bonds. The bonds were dated January 1, 2024 Maturity date is 1/1/29. Interest is paid semi-annually on January 1 and July 1. Straight-line amortization is used. A total of $210,500 in cash was received, which included accrued interest. What appears as Interest Payable on the 12/31/24 balance sheet? Select one:

a.$9,000
b.$6,000
c.$12,000
d.$18,000
e.$15,000

Answer 1

The interest payable on the 12/31/24 balance sheet is $15,000.

Step-by-step explanation:

The interest payable on the 12/31/24 balance sheet can be calculated by determining the interest expense for the period from March 1, 2024, to December 31, 2024. Since interest is paid semi-annually on January 1 and July 1, a total of two interest payments are made in 2024. The bond carries an annual interest rate of 9%, so for a $200,000 bond, the annual interest expense would be $18,000 (9% of $200,000).

To determine the interest expense for the period from March 1, 2024, to December 31, 2024, we need to calculate the portion of the interest expense that corresponds to this period. Since straight-line amortization is used, the interest expense is evenly spread out over the bond's life.

From March 1, 2024, to December 31, 2024, is a period of 10 months (10/12 of a year). So, the interest expense for this period will be 10/12 of the annual interest expense, which can be calculated as (10/12) * $18,000 = $15,000.

Therefore, the correct answer is $15,000 (option e).