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Alliance Corp. issued a $500,000, 8%, 10-year bond on March 1, 2010. The bond pays interest semi-annually on March 1 and September 1. At the time of issue, the market rate of interest was 10% and the bond sold for $437,700.
-How much interest expense did Alliance recognize on September 1, 2010?
A) $17,508
B) $20,000
C) $23,115
D) $25,000
E) $43,770

Question

Use the following information to answer questions 
Alliance Corp. issued a $500,000, 8%, 10-year bond on March 1, 2010. The bond pays interest semi-annually on March 1 and September 1. At the time of issue, the market rate of interest was 10% and the bond sold for $437,700.
-How much interest expense did Alliance recognize on September 1, 2010?
A) $17,508
B) $20,000
C) $23,115
D) $25,000
E) $43,770

Quizplus · Accepted Answer

The interest expense recognized by Alliance on September 1, 2010, is calculated using the effective interest method. This involves applying the market interest rate at the time of issuance (10%) to the carrying amount of the bond. The carrying amount at issuance is $437,700. Therefore, the interest expense for the first six months is 10% annual rate / 2 (for semi-annual) * $437,700 = $21,885. However, this does not match any of the options provided, suggesting a possible miscalculation in the question or answer choices. The closest correct approach to calculating interest expense is applying the market rate to the bond's carrying value, but none of the provided choices accurately reflects this calculation based on the given data.

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