Question

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Payment Cash Effective Interest Decrease in Balance Outstanding Balance 8,640,967 1 300,000 345,639 45,639 8,686,606 2 300,000 347,464 47,464 8,734,070 3 300,000 349,363 49,363 8,783,433 4 300,000 What is the interest expense on the bonds for the year ended December 31, 2019? Multiple Choice $100,700. $600,000. $700,700. $347,464.

Answer 1

Answer:

$600,000.

The interest rate of the bond issued it's 6%, so the company always pays the same amount of interest, $300,000 (3%) each period because it's semiannually, total year of $600,000.              

The difference lies on the rate interest accepted by the market, the information indicates that the market requires a higher interest rate to lend the money to the company at this moment.            

Explanation:

It the moment of the bond issued the company register:      

 Debit  $8,640,967  Cash    

 Debit  $1,359,033  Discount on Bonds Payable  

 Credit  $10,000,000  Bonds Payable  

At the moment of record the first interest payment    

 Debit  $345,639  Bond Interest Expense  

 Credit  $45,639    Discount on Bond Payable  

 Credit  $300,000  Cash  

At the moment of record the second interest payment    

 Debit  $347,464  Bond Interest Expense  

 Credit  $47,464    Discount on Bond Payable  

 Credit  $300,000  Cash