Final answer:
The interest expense recognized by Congo Express Airways for the bond issue in year 1 would be $244,684, calculated by adding the semiannual cash interest payment of $111,000 to the semiannual amortization of the bond discount of $11,342 and then multiplying by two. Therefore correct option is E
Step-by-step explanation:
To calculate the amount of interest expense recognized by Congo Express Airways on the bond issue in year 1, we first note that the bond has a face value of $3,700,000 with a stated interest rate of 6%, resulting in an annual interest payment of $222,000 (which is $3,700,000 × 6%).
However, since the interest is paid semiannually, this amount is divided by two, leading to a payment of $111,000 every six months.
The bond was issued at a discount, meaning its issue price is less than its face value.
The discount ($3,700,000 - $3,359,747 = $340,253) is amortized over the life of the bond, which increases the interest expense beyond the cash interest payments.
Given that the discount is being amortized at a rate of $11,342 every six months, this means that the interest expense for each six-month period includes both the cash payment and the amortization of the discount.
The interest expense for six months is $111,000 + $11,342 = $122,342.
Since there are two interest payments in year 1, the total interest expense for year 1 would be
$122,342 × 2 = $244,684.