Question

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2017?
a. $585,000
b. $1,170,000
c. $1,176,373
d. $1,176,249

(please show work)

Answer 1

• All working forms part of the answer
• Working

Period	Cash payment	Interest expense	Discount on Bonds payable	Carrying Value of Bond
Issued				$              147,03,108.00
30 June 2017	$               5,85,000 [15000000 x 7.8% x 6/12]	$         5,88,124 [14703108 x 8% x 6/12]	$                 3,124 [588124 – 585000]	$              147,06,232 [ 14703108 + 3124]
31 Dec 2017	$               5,85,000 [15000000 x 7.8% x 6/12]	$         5,88,249 [14706232 x 8% x 6/12]	$                 3,249 [588249 – 585000]	$              147,09,482 [14706232 + 3249]

• Total Interest expense for 2017 = $ 588,124 + $ 588,249 = $ 1,176,373
• Correct answer is Option ‘C’: $ 1,176,373