Question

A company issued 7%, 5-year bonds with a par value of $900,000. The market rate when the bonds were issued was 7.5%. The company received $885,000 cash for the bonds. What is the amount of interest expense for the first semiannual interest period?

Answer 1

$33,000

Step-by-step explanation:

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Discount on the bond = Face value - cash proceeds = $900,000 - $885,00 = $15,000

According to straight line amortization

Discount charged in the period = $15,000 / 5 = $3,000 per year = $1,500 per six months

Cash payment of interest = $900,000 x 7% = $63,000 per year = $31,500 per six months

Total Interest Expense = $31,500 + $1,500 = $33,000