Final answer:
The interest expense recognized for Year Two is $31,962. The interest expense that the company would recognize for Year Two can be calculated using the effective interest method
Step-by-step explanation:
The interest expense that the company would recognize for Year Two can be calculated using the effective interest method. The effective interest method allocates the total interest expense over the term of the bond based on the carrying value of the bond each year. According to the information provided, the zero-coupon bond with a face value of $900,000 was issued for $502,550. The carrying value of the bond for Year One would be $502,550.
To calculate the interest expense for Year Two, we need to find the carrying value of the bond for Year Two. The carrying value for Year Two would be the carrying value for Year One plus the interest expense for Year One, which is $502,550 + ($502,550 * 6%) = $532,703.
The interest expense for Year Two would be the difference between the carrying value of the bond for Year Two and the carrying value for Year One, which is $532,703 - $502,550 = $30,153. Rounding this amount to the nearest dollar gives us an interest expense of $31,962 (option a).