Question

On January 1, Year 1, Victor Company issued bonds with a $650,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense appearing on the income statement for the year ending December 31, Year 3?

Answer 1

Interest expense in year 3 = $51,500

Working

	Changes During the Period			Ending Bond Liability Balance
Period Ended	Cash Paid	Discount Amortized	Interest expense	Bonds payable	Discount on Bonds payable	Carrying Value
Start				$               650,000	$                 32,500	$           617,500
Ye 1	$               45,000	$                 6,500	$              51,500	$               650,000	$                 26,000	$           624,000
Ye 2	$               45,000	$                 6,500	$              51,500	$               650,000	$                 19,500	$           630,500
Ye 3	$               45,000	$                 6,500	$              51,500	$               650,000	$                 13,000	$           637,000