A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109.

Using effective-interest amortization, how much interest expense will be recognized in 2012?

a. $585,000b. $1,170,000c. $1,176,374d. $1,176,249

Interest Expense for 2017 is $1,176,373

Explanation:

Interese Expense to be recognized in 2017 is $1,176,373

Interest Expense for Jan-Jun = $14,703,108 * 8%/2 = $588,124

Amortization of Discount = ($14,703,108 * 8%/2) - ($15,000,000 * 7.8%/2)

= $588,124 - $585,000 = $3,124

Carry Amount of Bond on June 30 = $14,703,108 + ($14,703,108 * 8%/2) - ($15,000,000 * 7.8%/2)

= $14,703,108 + $588,124 - $585,000 = $14,706,232

Interest Expense for Jun-Dec = [$14,703,108 + ($14,703,108 * 8%/2) - ($15,000,000 * 7.8%/2) ] * 8% / 2

= ($14,703,108 + $588,124 - $585,000) * 8% / 2

= $14,706,232 * 8% / 2 = $588,249

Interest Expense for 2017 = $588,124 + $588,249 = $1,176,373