A company issued 5-year, 7% bonds with a par value of $500,000. The market rate when the bonds were issued was 6.5%. The company received $505,000 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

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28 December, 10:05

A company issued 5-year, 7% bonds with a par value of $500,000. The market rate when the bonds were issued was 6.5%. The company received $505,000 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

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Chandler · Answer 1

The correct answer is $17,000.

Explanation:

According to the scenario, the given data are as follows:

Bonds percent = 7%

Par value of bonds = $500,000

Market rate = 6.5%

Cash received = $505,000

So, we can calculate the amount of recorded interest for semiannual interest period by using following formula:

First we calculate the premium on bonds,

So, Premium on bonds = Cash received - Par value of bonds

= $505,000 - $500,000

= $5,000

So, straight line amortization = Premium on bonds : years

= $5,000 : 5

= $1,000

So, Amount of interest expense for first semiannual is as follows:

Amount of interest = (Par value of bonds * Bonds percent) : 2 - (straight line amortization : 2)

= ($500,000 * 7%) : 2 - ($1,000 : 2)

= $17,500 - $500

= $17,000.