Question

On January 1, 2020, Cougar Sales, Inc. issued $15,000 in bonds for $14,700. They were 6-year bonds with a stated rate of 9%, and pay semiannual interest. Cougar Sales, Inc. uses the straight-line method to amortize the Bond Discount. On June 30, 2020, when Carter makes the first payment to bondholders, how much will they report as Interest Expense?

Answer 1

Answer:

$700

Explanation:

If a bond is issued at a lower price than the face value of the bond, then the bond is issued on the discount. This discount is amortized over the bond's life. This amortization will be expensed as Interest Expense.

Discount = Face value - Issuance price = $15,000 - $14,700 = $300

Bond's Life = 6 years

Amortization of discount = $300 / 6 = $50 annually = $25 semiannually

Coupon Payment = Face Value x coupon Rate = $15,000 x 9% = $1.350 annually = $675 semiannually

Interest Expense Includes both the coupon payment and discount amortization for the period.

Interest Expense = $675 + $25 = $700