On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the semi-annual interest expense when the straight-line method is utilized?

Question

Quizplus · Accepted Answer

- The face value of the bond is $30,000 and it is a 7% bond, which means that the annual interest payment is $30,000 x 7% = $2,100.
- The bond was issued at a discount of $30,000 - $29,100 = $900.
- The bond has a 10-year term, which means it will have 20 interest payments (10 years x 2 payments per year).
- To calculate the annual interest expense using the straight-line method, we divide the total discount by the number of interest payments. In this case, that is: $900 / 20 = $45 per interest payment.
- Since interest is paid twice a year, the semi-annual interest expense is $45 x 2 = $90.
- However, the question asks for the semi-annual interest expense using the straight-line method, not the effective interest method. Therefore, we have to divide the annual interest expense uniformly between the two interest payments.
- The annual interest expense is $2,100, so the semi-annual interest expense using straight-line method is $2,100 / 2 = $1,050. 
- Therefore, the correct answer is C.

On November 1, 2013, Davis Company Issued $30,000, Ten-Year, 7