Jorge Corp. issued $520,000 of 6%, 10-year bonds on January 2, 2018 for $510,000. In addition, the company incurred $50,000 in bond issue costs. Interest is paid annually on December 31. What is the correct amount of bond interest expense to be recorded on December 31, 2018 using GAAP?

Question

Quizplus · Accepted Answer

The bond interest expense includes the amortization of both the discount and the bond issue costs. The bond was issued at a discount of $10,000 ($520,000 - $510,000) and incurred $50,000 in bond issue costs. These costs are amortized over the bond's life (10 years). The annual interest expense is the cash interest payment ($520,000 x 6% = $31,200) plus the annual amortization of the discount and bond issue costs (($10,000 + $50,000) / 10 = $6,000), totaling $31,200 + $6,000 = $37,200. However, the correct choice is $35,420, which suggests a different calculation or error in the options provided.