Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the amount of interest expense Sparks will show with relation to these bonds for the year ended December 31, 2017?
A)$48,000
B)$50,760
C)$44,550
D)$37,650

Question

Quizplus · Accepted Answer

The bond premium is $34,500 ($634,500 - $600,000). 
The premium amortization each year is ($34,500 / 10) = $3,450. 
Interest expense for the year ended December 31, 2017 is calculated as follows: 
Face value of bonds × stated interest rate = ($600,000 × 8%) = $48,000
Add: Premium amortization for the year = $3,450
Total interest expense = $48,000 + $3,450 = $51,450
However, the call price of 102 means that the bonds can be redeemed at 102% of face value, or $612,000 ($600,000 × 102%). Since this call price is higher than the bond's carrying value ($634,500 - $34,500 = $600,000), it is likely that the bonds will be called before maturity. Therefore, Sparks should also make a note of the potential gain or loss on early extinguishment of debt when preparing their financial statements.

Sparks Company Received Proceeds of $634,500 on 10-Year, 8% Bonds