On 2 January 2014, Mahoney Sales issued $10 000 in debentures for $9 400. They were 5- year debentures with a stated rate of 4%, and pay half- yearly interest payments. Mahoney Sales uses the straight- line method to amortise the debenture discount. On 30 June 2014, when Mahoney makes the first payment to debenture holders, how much will they report as interest expense?
A)$260
B)$200
C)$400
D)$60

Question

Quizplus · Accepted Answer

The interest expense includes the cash interest payment plus the amortization of the discount. The cash interest payment is $10,000 * 4% / 2 = $200. The discount of $600 ($10,000 - $9,400) is amortized over 10 periods (5 years, semi-annual), so $600 / 10 = $60 per period. Total interest expense = $200 + $60 = $260.

On 2 January 2014, Mahoney Sales Issued $10 000 in Debentures