Smith Corp. issued S400,000 of 5-year, 7% bonds at 104.265 with a market interest rate of 6%.

Smith Corp. issued S400,000 of 5-year, 7% bonds at 104.265 with a market interest rate of 6%. The bonds were sold on their issue date, March 1, 2019. Interest is payable on March 1 and September 1. What is the amount of the effective interest expense on September 1, 2019 when the first interest payment is made?

A $12,000

B. $14,000

C. $48,000

D. $12,512

Expert Solution

Issue value of the Bonds = Face value of the Bonds x Issue price / 100

= $400,000 x 104.265/100

= $417,060

Interest expense on September 1, 2019 = Issue value of the Bonds x market rate of interest x No. of months / 12

= $417,060 x 6% x 6/12

= $12,512

Option D. $12,512 is the correct answer.

DEEPIKA GOYAL answered 2 years ago

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