Question

On January 1, the Kings Corporation issued 10% bonds with a face value of $98,000. The bonds are sold for $96,040. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, ten years from now. Kings records straight-line amortization of the bond discount. Determine the bond interest expense for the year ended December 31 of the first year is. Select the correct answer. $9,800 $9,604 $9,996 $1,960

Answer 1

The correct answer is $9,800

Step-by-step explanation:

Solution:

Recall that

Kings Corporation issued bonds of = 10%

Face value = $98,000

Bonds sold for = 96,040

Determine the bond interest expense for the year ended December 31 of the first year

Now,

$98,000 * 10 bond = 9,800

Therefore, the bond interest expense for the year ended December 31 of the first year is + $9,800

Answer 2

$9,996

Step-by-step explanation:

The bond is issued on discount when the issuance price is lower than the face value of the bond. The discount on the bond will be expensed over the bond period until maturity.

Discount on Bond = Face value - Issuance value = $98,000 - $96,040 = $1,960

Interest Expense includes the interest payment and the discount amortization.

Discount amortization = Discount value / Life of the bond = $1,960 / 10 = 196 per year = $98 semiannually

Interest Payment = $98,000 x 10% = $9,800 annually = $4,900 semiannually

Interest Expense = ( 4,900 + 98 ) x 2 = $9,996