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On January 1, Year 1, Hanover Corporation issued bonds with a $70,500 face value, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year.

-How much interest expense will Hanover report on its income statement on December 31,Year 1?
A)$423
B)$2,115
C)$5,640
D)$6,063

Question

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

On January 1, Year 1, Hanover Corporation issued bonds with a $70,500 face value, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year.

-How much interest expense will Hanover report on its income statement on December 31,Year 1?
A)$423
B)$2,115
C)$5,640
D)$6,063

Quizplus · Accepted Answer

Issue price = Face value of $70,500 × 97% = $68,385
Discount = Face value of $70,500 - Issue price of $68,385 = $2,115
Annual amortization of discount = $2,115 ÷ 5 years = $423
Cash interest payment = Face value of $70,500 × 8% = $5,640
Interest expense = Cash payment of $5,640 + Amortization of discount of $423 = $6,063

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