Question

The Marx Company issued $98,000 of 8% bonds on April 1 of the current year at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1, and mature in five years, on January 1. Determine the total interest expense related to these bonds for the current year ending on December 31.

Answer 1

$4,800

Step-by-step explanation:

Interest Expense of the bond is calculated by multiplying Face value and Coupon rate. Any discount or premium is amortized over the life of the bond and added or deducted from the interest payment in order to record the interest expense.

As per given data

Face value of Bond = $80,000

Coupon Rate = 8%

Interest Expense = Face value x Coupon rate

As on July 1 interest of only 3 months has been accrued, so we will record the interest expense of 3 months only.

On July 1

Interest Expense = $80,000 x 8% x 3/12 = $1,600

6 month period Expense will be recorded.

On December 31

Interest Expense = $80,000 x 8% x 6/12 = $3,200

Total Expense = $1,600 + $3,200 = $4,800