Question

Please show work and explain.

Use the following to answer questions 5 and 6:

On January 1, 2017, Nevada Corporation issued 8% bonds with a face value of $10,000,000. The bonds sold for $11,487,747. They mature in ten years and pay interest semiannually on June 30th and December 31st. The market rate of interest at the time the bonds were issued was 6%. Nevada uses the effective interest method for amortizing bond discounts and premiums.

Total interest expense Nevada would report on its income statement for the year ended December 31, 2017 relative to these bonds is closest to:
A) $800,000
B) $600,000

C) $689,265

D) $687,603

Total interest paid by Nevada on these bonds for the year ended December 31, 2017 is closest to:
A) $800,000
B) $600,000

C) $689,265

D) $687,603

Answer 1

We need to prepare the Bond Premium amortization table to answer these parts

Schedule of Amortization of Bond PREMIUM (Effective Rate Method)
Payment intervals	Date	Cash Paid (Face Value of the Bonds $10,000,000 x Coupon Rate 8% * 1/2 half yearly)	Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 6% * 1/2 Half Yearly)	Premium Amortized (Cash Paid - Interest Expense)	Premium on Bonds Payable (Unamortized Portion B/S)	Par Value of Bonds Payable	Carrying Value of the bonds at the end of period (Par Value + Balance of Unamortized Bond Premium)
0	Jan.1, 2017				$1,484,747	$10,000,000	$11,484,747
1	June.30, 2017	$400,000	$344,542	$55,458	$1,429,289	$10,000,000	$11,429,289
2	Dec.31, 2017	$400,000	$342,879	$57,121	$1,372,168	$10,000,000	$11,372,168
		$800,000	$687,421	$112,579

Now we can answer the questions:

Part 5 --- The closest to $687,421 is $687,603

Total interest expense Nevada would report on its income statement for the year ended December 31, 2017 relative to these bonds is closest to D. $687,603

Part 6 –

Total interest paid by Nevada on these bonds for the year ended December 31, 2017 is closest to A. $800,000

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