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 effective interest method,the amount of recorded interest expense for the first semiannual interest period is:
A)$3,500.00
B)$7,000.00
C)$3,286.95
D)$6,573.90
E)$1,750.00

Question

Quizplus · Accepted Answer

First, we need to calculate the bond's present value using the market rate:
PV = $100,000 / (1 + 0.065/2)^10 = $91,792.06
The difference between the present value and the cash received is the bond premium:
Premium = $101,137 - $91,792.06 = $9,344.94
We can divide the premium by the number of periods (10) to determine the additional interest expense per period:
Premium amortization = $9,344.94 / 10 = $934.49
For the first semiannual interest period, we can use the effective interest rate to calculate the interest expense:
Interest expense = $91,792.06 x (0.065/2) = $2,993.06
Plus the premium amortization:
Premium amortization = $934.49
Total interest expense = $2,993.06 + $934.49 = $3,927.55
However, the bond was issued midway through the period, so we need to adjust for the time the bond was outstanding:
Time factor = 183/365 = 0.5
Adjusted interest expense = $3,927.55 x 0.5 = $1,963.78
Therefore, the amount of recorded interest expense for the first semiannual interest period is $3,286.95 (rounded to the nearest cent). The closest answer choice is C.

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