On December 31,2013,a corporation issued $200,000 face value,12 percent bonds that mature 10 years from the date of issue.The issue price was 97.If the firm uses the straight-line method of amortization,interest expense for 2014 will be reported at

Question

Quizplus · Accepted Answer

The annual interest payment is calculated as 12% of $200,000 = $24,000. Since the bonds were issued at a discount (97), this means that the total proceeds received by the corporation were $200,000 x 0.97 = $194,000.

Using the straight-line method of amortization, we need to spread the discount of $6,000 over the life of the bonds. This means that each year, $6,000/10 = $600 of the discount will be amortized (subtracted from interest expense) and added to the carrying value of the bonds.

Therefore, the interest expense for 2014 will be $24,000 - $600 = $23,400.

On December 31,2013,a Corporation Issued $200,000 Face Value,12 Percent Bonds