Downs Company issued $400,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds?
A) $184,000
B) $136,000
C) $112,000
D) $160,000

Question

Quizplus · Accepted Answer

The total interest cost is calculated as the sum of the annual interest payments minus the premium amortized over the bond's life. The annual interest payment is $32,000 ($400,000 * 8%). The premium is $24,000 ($400,000 * 6%). The annual premium amortization is $4,800 ($24,000 / 5 years). The total interest cost is $160,000 ($32,000 * 5) minus $24,000, which equals $136,000.

Downs Company Issued $400,000 of 8%, 5-Year Bonds at 106