Question

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Assuming a straight-line amortization of the discount, the amount of interest expense recognized on the December 31, Year 1 income statement is

Answer 1

$3,600

Step-by-step explanation:

According to the scenario, computation of the given data are as follows,

Bonds Face value = $50,000

Discount = 4%

Time period = 20 years

Interest rate = 7%

Premium = $50000 - ( $50,000 × 96%) = $2,000

So, we can calculate interest expense by using following formula,

Interest expense = ($50,000 × 7%) + ($2,000 ÷ 20)

= $3,600