Question

Milan Company issued bonds with a face value of $200,000 on January 1, 2018. The bonds had a 7 percent stated rate of interest and a six-year term. The bonds were issued at face value. Interest is payable on an annual basis. Required What total amount of interest will Milan Company pay in 2018 if bond interest is paid annually each December 31? What total amount of interest will Milan Company pay in 2018 if bond interest is paid semiannually each June 30 and December 31?

Answer 1

Answer:

annual interest expense $ 14,000

interest expense per semiannual payment: $ 7,000

for a total of $ 14,000

Explanation:

The bonds were issued at face value.  Thus, the interest expense will match the cash payment of the bond.

annual interest:

principal x rate x time

200,000 x 7% = 14,000

semiannual interest

principal x rate x time

200,000 x 7% x 1/2 (half-year) = 7,000

Note:

We must express rate and time under the same metric. As the 7% rate is annual we multiply by 1/2 (a half) as there are 2 payment per year.