On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The amount of interest expense each semi-annual period using straight-line amortization is:
A)$14,000.00.
B)$28,000.00.
C)$17,620.70.
D)$31,241.40.
E)$15,620.70.

Question

Quizplus · Accepted Answer

The total discount on the bonds is $400,000 - $383,793 = $16,207. This discount is amortized over 10 periods (5 years x 2), resulting in $1,620.70 per period. The cash interest payment is $400,000 x 7% / 2 = $14,000. Therefore, the interest expense each period is $14,000 + $1,620.70 = $15,620.70.

On January 1, a Company Issues Bonds Dated January 1