On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,087 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:
A)$132,500.
B)$225,000.
C)$265,174.
D)$245,000.
E)$224,826.

Question

Quizplus · Accepted Answer

The correct answer is C. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be $265,174.The bond premium or discount is being amortized at a rate of $10,087 every six months. This means that the carrying value of the bond will increase by $10,087 every six months. The interest expense is calculated as the carrying value of the bond multiplied by the market rate of interest. In this case, the carrying value of the bond on January 1 of Year 1 is $3,197,389. The market rate of interest is 8%. Therefore, the interest expense for the first six months of Year 1 is $3,197,389 x 8% x 6/12 = $132,500. The carrying value of the bond on July 1 of Year 1 is $3,197,389 + $10,087 = $3,207,476. The interest expense for the second six months of Year 1 is $3,207,476 x 8% x 6/12 = $132,674. Therefore, the total interest expense for Year 1 is $132,500 + $132,674 = $265,174.

On January 1 of Year 1,Congo Express Airways Issued $3,500,000