Question

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

Answer 1

Answer:

Total Interest Expense=$1,176,498.32

Closest answer from the option is $1,176,374 (C)

Explanation:

Using effective Interest rate method.

The bond was issued at discount and it has 40 semi-annual interest repayment periods.

The discount on the bond will be amortised over the entire life of the bond.

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