On January 1, 2011, Matlock Inc. issued its 10 percent bonds in the face amount of $1,500,000. They mature on January 1, 2021. The bonds were issued for $1,329,000 to yield 12 percent, resulting in bond discount of $171,000. Matlock uses the effective-interest method of amortizing bond discount. Interest is payable July 1 and January 1. For the six months ended June 30, 2011, Matlock should report bond interest expense of

Question

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The bonds were issued at a discount of $171,000, which is the difference between the face value of $1,500,000 and the issue price of $1,329,000. This bond discount needs to be amortized over the life of the bond using the effective-interest method.

First, we need to calculate the annual interest expense, which is 10% of the face value, or $150,000. Since interest is payable semi-annually, the interest expense for the six months ended June 30, 2011, is half of this amount, or $75,000.

Next, we need to calculate the amount of bond discount that needs to be amortized for the six-month period. To do this, we use the effective-interest method, which involves multiplying the carrying value of the bond by the effective interest rate.

The carrying value of the bond as of January 1, 2011, was $1,329,000 (the issue price). The effective interest rate is 12%, which is the rate that equates the present value of the bond's future cash flows (interest payments and principal repayment) with the issue price. Using this rate and the carrying value, we can calculate the interest expense for the period and the new carrying value of the bond:

Interest expense = carrying value x effective interest rate 
= $1,329,000 x 12%/2 
= $79,740

New carrying value = carrying value + interest expense - interest paid 
= $1,329,000 + $79,740 - $0 
= $1,408,740

The difference between the old carrying value and the new carrying value ($1,408,740 - $1,329,000 = $79,740) is the amount of bond discount that needs to be amortized for the six-month period. This is added to the bond interest expense for the period to arrive at the total bond interest expense:

Total bond interest expense = interest expense + bond discount amortization 
= $75,000 + $79,740 
= $154,740

Therefore, the answer is B) $79,740.