Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated 31 December, Year 1. The bonds are issued on 30 April, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each 30 June and 31 December.
-The amount of Austin's interest expense on this bond issue during year 2 amounts to:
A) $400,000.
B) $450,000.
C) $360,000.
D) $600,000.

Question

Quizplus · Accepted Answer

The bonds were issued on 30 April, Year 2, which is 120 days after the last interest payment date (31 December, Year 1). Therefore, the accrued interest on the bonds at the time of issuance is $6,000,000 x 10% x 120/360 = $200,000. The total interest expense for the year is $6,000,000 x 10% x 6/12 = $300,000. Adding the accrued interest to the interest expense gives a total interest expense of $300,000 + $200,000 = $400,000.

Austin Corporation Issues $6,000,000 of 10%, 10-Year Bonds, Dated 31