Final answer:
The first year's interest expense for the bond issued by Basil Company, considering straight-line amortization of the premium, is $33,280.
Step-by-step explanation:
The amount of interest expense for the first year of the bond issued by Basil Company, which has a face value of $640,000, a coupon rate of 6%, was sold for 104, and has five years to maturity, with interest paid annually, can be calculated considering both the cash interest payments and the amortization of the bond premium.
The annual cash interest payment is calculated by multiplying the face value of the bond ($640,000) by the coupon rate (6%), which results in annual cash interest of $38,400.
Since the bonds were sold at 104, this means they were sold for 104% of their face value. Therefore, the company received $640,000 x 104% = $665,600.
The premium on the bonds is $665,600 - $640,000 = $25,600.
Assuming straight-line amortization, this premium is spread evenly over the life of the bonds, which is 5 years, resulting in an annual amortization of $25,600 / 5 = $5,120.
To find the first year's interest expense, we subtract the annual amortization from the annual cash interest: $38,400 - $5,120 = $33,280.