Question

On January 1, 2018, Bentley Corporation issued $1,000,000 of 10-year, 8% bonds at 105, when the market rate of interest was 7%. The bonds pay interest annually on December 31. The company uses the effective interest method of amortization. How much interest expense will Bentley Corporation report on its income statement for the year ended December 31, 2018?

Answer 1

Answer:

$80,000

Explanation:

Given:

Amount issued by the Bentley Corporation = $1,000,000

Duration = 10 years

Interest rate on the bods = 8% annually

Market rate of interest = 7% annually

Now,

the interest charged will at the rate on the bonds i.e 8%,

therefore,

the Interest expenses = Rate × Amount issued

on substituting the respective values, we get

the Interest expenses = 0.08 × $1,000,000

or

the Interest expenses = $80,000