Terrance Company issued $500,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?

Question

Quizplus · Accepted Answer

The bonds were issued at 106, which means the company received $530,000 ($500,000 x 106%).

The bond interest expense will be evenly amortized over the 5-year life of the bonds.

The annual interest payment is calculated as: 
$500,000 x 8% = $40,000

Since the bonds were issued at a premium, the interest expense will be less than the interest payment.

The premium amortization per year is calculated as: 
($530,000 - $500,000) / 5 years = $6,000

Therefore, the bond interest expense on the next interest date will be: 
$40,000 - $6,000 = $34,000 (Option C)

Terrance Company Issued $500,000 of 8%, 5-Year Bonds at 106