Exhibit 14-4 A $300, 000, ten-year, 6% bond issue was sold to yield 7% interest payable annually.Actuarial information for 10 periods is as follows:
$\begin{array}{lll}
&6\%&7\%\
\text { Present value of } 1 & .558 & .508 \
\text { Present value of an anmuity of } 1 & 7.360 & 7.024
\end{array}$

- Refer to Exhibit 14-4.Using the effective interest method interest expense at the end of the first year is

Question

Exhibit 14-4 A $300, 000, ten-year, 6% bond issue was sold to yield 7% interest payable annually.Actuarial information for 10 periods is as follows:
$\begin{array}{lll}
&6\%&7\%\
\text { Present value of } 1 & .558 & .508 \
\text { Present value of an anmuity of } 1 & 7.360 & 7.024
\end{array}$

- Refer to Exhibit 14-4.Using the effective interest method interest expense at the end of the first year is

Quizplus · Accepted Answer

The effective interest rate is calculated as follows:
Effective interest rate = (Total interest payments / Total bond principal) = (60,000 / 300,000) = 0.2 or 20%
Interest expense for the first year = Book value of bond at beginning of year x Effective interest rate
= 300,000 x 20% = $60,000
However, only $50,482 was actually paid in cash (7% of the initial bond principal). Therefore, the interest expense recorded in the first year will be the cash paid ($50,482) plus the amortized discount ($8,036), which is $58,518. 
The interest expense ($58,518) is the amount that will be recorded at the end of the first year, so the answer is B) $19,518.