A company issued five-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $101,137 cash for the bonds.Using the straight-line method,the amount of recorded interest expense for the first semiannual interest period is:
A)$3,386.30
B)$3,500.00
C)$3,613.70
D)$6,633.70
E)$7,000.00

Question

Quizplus · Accepted Answer

The bonds were issued at a premium because the market rate (6.5%) was lower than the coupon rate (7%). The premium is $1,137 ($101,137 - $100,000). Using the straight-line method, the premium amortization per period is $1,137 / 10 periods = $113.70. The semiannual interest payment is $3,500 ($100,000 * 7% / 2). Therefore, the interest expense for the first period is $3,500 - $113.70 = $3,386.30.

A Company Issued Five-Year,7% Bonds with a Par Value of $100,000.The