Question

On January 1, 2009, a company issued and sold a $570,000, 6%, 5-year bond payable and received proceeds of 560,000. Interest is payable each June 30 and December 31. What is the semi-annual Bond Interest Expense?

Answer 1

$18,100

Step-by-step explanation:

The bond is issued on discount when the issuance price is less than the face value of the bond. The discount is amortized over the period until maturity. Total Interest expense on a discounted bond is the sum of the coupon payment and the amortization of the discount amount.

Coupon payment = $570,000 x 6% = $34,200 per year = $17,100 semiannually

Discount on the bond = $570,000 - $560,000 = $10,000

Discount amortized per year = $10,000 / 5 = $2,000 annually = $1,000 semi-annually

Total Interest Expense = Coupon Payment + Amortization of Discount

Total Interest Expense = 17,100 + 1,000 = $18,100