on january 1, year 1, denver co. issued bonds with a face value of $100,000, a stated rate of interest of 8%, and a 5-year term to maturity. the bonds were sold at 102.5. denver uses the straight-line method to amortize bond discounts and premiums. what is the amount of interest expense during year 1?

Interest expense is the amount of money a company pays out for borrowing money or using credit. It is usually a cost to the company in the form of interest payments to lenders, such as banks or other financial institutions. Interest expense is a non-operating expense, meaning it is not related to the company's core operations. It is usually seen on a company's income statement as an expense associated with debt financing. Companies typically use interest expense to finance long-term investments, such as capital projects, acquisitions, or research and development.

The interest expense for each year is equal to the face value of the bonds multiplied by the stated rate of interest (8%). Since the bonds were sold at a premium of 2.5%, the interest expense for the first year is not equal to the face value of the bonds multiplied by the stated rate of interest, but is instead equal to the face value of the bonds multiplied by the stated rate of interest minus the amortization of the premium.

The amortization of the premium is calculated as the premium amount divided by the remaining term to maturity (in this case 5 years). The premium amount is equal to the face value of the bonds multiplied by the premium rate (2.5%). Therefore, the amortization of the premium is equal to the face value of the bonds multiplied by the premium rate divided by the remaining term (5 years).

In this case, the amortization of the premium is equal to $100,000 x 2.5% / 5 years = $5,000. The interest expense for year 1 is therefore equal to $100,000 x 8% - $5,000 = $8,000.

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