Question

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31. Assuming Weller issued the bond for $431,940, the amount of interest expense appearing on the Year 3 income statement would be:

Answer 1

$33,649

Step-by-step explanation:

Period Interest Exp Interest paid Premium amortized Carrying value

0 - - - $431,940

1 34,555 40,000 5,445 $426,495

2 34,120 40,000 5,880 $420,615

3 33,649 40,000 6,351 $414,264

Interest expenses = Carrying value * 8%

Premium amortized = Interest paid - Interest Expenses

Carrying value 1 = Carrying value 0 - Premium amortized