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On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums.

-Assuming Wayne issued the bond for 102.5,what is the amount of interest expense that will be reported on the income statement for the year ending December 31,Year 1?
A)$34,500
B)$36,000
C)$37,500
D)$15,000

Question

[The following information applies to the questions displayed below.]

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums.

-Assuming Wayne issued the bond for 102.5,what is the amount of interest expense that will be reported on the income statement for the year ending December 31,Year 1?
A)$34,500
B)$36,000
C)$37,500
D)$15,000

Quizplus · Accepted Answer

Issue price = Face value of $600,000 × 102.5% = $615,000
Premium = Issue price of $615,000 - Face value of $600,000 = $15,000
Annual amortization of premium = $15,000 ÷ 10 years = $1,500
Annual interest payment = $600,000 × Stated rate of 6% = $36,000
Interest expense = Cash payment of $36,000 - Amortization of premium of $1,500 = $34,500

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