On November 1,2019,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2019,and interest is payable each November 1 and May 1.Davis uses the straight-line method of amortization.
- How much is the semiannual interest expense when the straight-line method of amortization is utilized?

Question

Quizplus · Accepted Answer

The annual interest payment is $30,000 x 7% = $2,100. Divided by two for semiannual payments, the semiannual interest payment is $1,050.

To calculate the bond discount, we subtract the bond issue price from the face value: $30,000 - $29,100 = $900.

Since the bond has a ten-year life, and the discount is $900, we divide the discount by the number of interest payments over the life of the bond. With interest payments due semiannually, there will be 20 interest payments (10 years x 2 payments per year = 20). The discount amortization per interest period is therefore $900 / 20 = $45.

Using the straight-line method, we amortize an equal amount of discount each period. The semiannual interest expense is therefore the sum of the periodic interest payments ($1,050) plus the amortization of the discount ($45), or $1,095.

On November 1,2019,Davis Company Issued $30,000,ten-Year,7% Bonds for $29,100