Question

A company issued 5-year, 7% bonds with a par value of $100,000. the company received $97,947 for the bonds. using the straight-line method, the amount of interest expense for the first semiannual interest period is: group of answer choices

O $3,294.70.
O $3,500.00.
O $3,705.30.
O $7,000.00.
O $7,410.60.

Answer 1

The interest expense for the first semiannual interest period using the straight-line method for the company's 5-year, 7% bonds is $3,705.30, which includes semiannual interest of $3,500 plus an amortization of the discount of $205.30.

The correct option is: $3,705.30.

Step-by-step explanation:

The question involves calculating the amount of interest expense for the first semiannual period for a company that issued 5-year, 7% bonds with a par value of $100,000 and received $97,947 for the bonds. To determine this, we use the straight-line method of amortization of bond discount or premium.

The bond pays 7% annual interest on its par value of $100,000, which equals $7,000 per year or $3,500 semiannually. Because the company received less than the par value, there is a bond discount of $2,053 ($100,000 - $97,947). This discount is amortized equally over the life of the bond, which is 5 years or 10 semiannual periods. Thus, the semiannual amortization amount is $205.30 ($2,053 / 10 periods).

The total interest expense for the first semiannual period includes the actual cash paid plus the amortization of the discount. Therefore, it equals $3,500 plus $205.30, which is $3,705.30. The correct option is: $3,705.30.