Question

Cramer Company sold five-year, 6% bonds on October 1, 2021. The face amount of the bonds was $185,000, while the issue price was $196,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2021, income statement (assume straight-line amortization)

Answer 1

$2,225

Step-by-step explanation:

For computing the interest expense, we need to do the following calculations which are shown below:

Cash interest = Face value × rate of interest × number of months ÷ total number of months in a year

= $185,000 × 6% × 3 months ÷ 12 months

= $2,775

Now

Premium Amortization is

= Premium amount ÷ number of year × number of months ÷ total number of months in a year

= $11,000 ÷ 5 years × 3 months ÷ 12 months

= $550

The $11,000 is come from

= $196,000 - $185,000

So,

Interest expense is

= Cash Interest - premium amortization

= $2,775 - $550

= $2,225