Question

A company issued 6-year, 8% bonds with a par value of $1,050,000. The market rate when the bonds were issued was 7.5%. The company received $1,060,500 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Answer 1

Answer:

$41,125

Explanation:

The calculation of semiannual interest period is shown below:-

Interest = 8% ÷ 2 = 4%

Interest paid = $1,050,000 × 4%

= $42,000

Premium on bonds amortization = (($1,060,500 - $1,050,000)÷ 12)

= $10,500 ÷ 12

= $875

Interest expense = Interest paid - Premium on bonds amortization

= $42,000 - $875

= $41,125

So, for computing the interest expense we simply deduct the premium on bonds amortization from interest paid.