Question

denver company issued bonds with a face value of 100,000 and stated interest rate of 8%. the bonds have a life of five years and were sold at 102 1/2. if denver amoritizes discounts and premiums using the straight line method, the amount of interest expense each full year would be

Answer 1

Answer:

$7,500

Explanation:

Calculation for the amount of interest expense each full year

First step is to calculate the the annual interest

Annual interest =$ 8,000

($100,000*8%)

Second step is to calculate the premium paid

Premium paid=$ 2,500

($ 100,000 * 2.5%)

Third step is to calculate the Amortization of premium

Amortization of premium=$500

( $2,500 / 5years )

Last step is to calculate the interest expenses using this formula

Interest expenses=Annual interest-Amortization of premium

Let plug in the formula

Interest expenses ($8,000 - $500 )

Interest expenses= $ 7,500

Therefore the amount of interest expenses each full year would be $7,500