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Sonja [21]
4 years ago
6

Brazen Inc. sells bonds with a face value of $1,000,000 and a contractual interest rate of 10% for $1,200,000. The bonds will ma

ture in 10 years. Using the straight-line method of amortization, how much interest expense will be recognized in year 1?
Business
1 answer:
chubhunter [2.5K]4 years ago
6 0

Answer:

$80,000

Explanation:

Given:

Face value = $1,000,000

Contractual interest rate = 10%  for $1,200,000

Maturity period = 10 years

Now,

contractual interest =  10% × Face value

= 10% × $1,000,000

= $100,000

The annual bond amortization = ( $1,200,000 - $1,000,000 ) ÷ 10

= $20,000

The annual interest expense = Face value - annual bond amortization

=  $100,000 - $20,000

= $80,000

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