Question

A company issued 5-year, 7% bonds with a par value of $200,000. The market rate when the bonds were issued was 6.5%. The company received $202,000 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: $6800

Explanation:

Based on the information that has been given in the question, Interest will be calculated as:

= $200,000 × 7% × 6/12

= $200,000 × 0.07 × 0.5

= $7,000

We then calculate the premium ammortizaion which will be:

= ($202,000 - $200,000) / 5 × 2

= $2000 / 5 × 2

= $2,000 / 10

= $200

Therefore, the interest expense to be recorded will be:

= $7,000 - $200

= $6,800