Question

In: Accounting

On January 1, Year 1, Victor Company issued bonds with a $650,000 face value, a stated...

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?

Solutions

Expert Solution

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

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