Exhibit 14-6 Alpha, Inc.issued $100, 000 of its 7% five-year bonds on January 1, 2010, at 98.Interest is paid on January 1 and July 1.The bonds are callable at 103 and straight-line amortization is used.The bonds are recalled on April 1, 2012.
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Refer to Exhibit 14-6.Interest expense for 2012 will be
A)$1, 750
B)$1, 800
C)$1, 850
D)$1, 900

Question

Quizplus · Accepted Answer

Interest expense for 2012 includes interest up to the recall date (April 1, 2012) plus amortization of the bond discount. The annual interest is $7,000 (7% of $100,000), and for three months (January 1 to April 1), it is $1,750. The bond was issued at 98, meaning a $2,000 discount ($100,000 - $98,000), which is amortized over 5 years, resulting in $400 annual amortization. For three months, this is $100. Therefore, the total interest expense for 2012 is $1,750 (interest) + $100 (amortization) = $1,850.