Question

a company issues a 10000 8 percent 10 year bond on jan 1 year 1 for 10420. Interest is paid annually on jan 1. If the company uses the straight line method of amortization of bond discounts and premiums, the amount of bond interest expense to be recognized in year 1 would be

Answer 1

The interest expense to be recognize in years 1 amounts to be 792 dollars.

Step-by-step explanation:

As per matching principle the interest expense to be recognized in income statement is calulated using effective rate of return. The effective rate is calculated using IRR method

For IRR purpose the cashflow will be taken as given below

Time (year) Cashflow

0 10,420

1-9 800

10 10,800

By hit and trail method IRR= 7.6 %

So interest expense to be recognized = 7.6% *10,420 = 792 dollars

(Standard applied IFRS 9)