Question

On January 1, a company issued 3%, 20-year bonds with a face amount of $80 million for $69,057,808 to yield 4%. Interest is paid semiannually. What was the straight-line interest expense on the December 31 annual income statement?

Answer 1

Answer:

Explanation:

First of all, calculate discount on the bond:

Discount = Face value - issue price = 80,000,000 - 69,057,808 = 10,966,224

Also, since interest is paid semiannually we need to multiply 20 by 2 = 40 periods

Then, we need to find amortized discount per period = 10,966,224/40 = 274,155.6

Now, identify interest expense on June 30:

Interest expense = interest paid + discount amortized per period

(80,000*0.03*6/12) +  274,155.6 = 1,200,000+274,155.6 = 1,474,155.6

interest expense on Dec 31:

(80,000*0.03*6/12) +  274,155.6 = 1,200,000+274,155.6 = 1,474,155.6

Total expense on Dec 31 = interest expense on June 30 +  interest expense on Dec 31 = 1,474,155.6 + 1,474,155.6 = 2,948,311.20