Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2017, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2022 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The total annual cash payment for interest on the bonds is:

Question

Quizplus · Accepted Answer

First, we need to calculate the bond's annual interest payment. The bond has a face value of $100,000 and an interest rate of 12%, so the annual interest payment is $12,000 ($100,000 x 12%).

Next, we need to calculate the bond's semi-annual interest payment. Since the bond pays interest twice a year (on June 30 and December 31), we divide the annual interest payment by 2:

$12,000 / 2 = $6,000

Finally, we add up the semi-annual interest payments for each year:

Year 1: $6,000 + $6,386 = $12,386 
Year 2: $6,000 + $6,129 = $12,129 
Year 3: $6,000 + $5,862 = $11,862 
Year 4: $6,000 + $5,585 = $11,585 
Year 5: $6,000 + $5,287 = $11,287

The total annual cash payment for interest on the bonds is the sum of these amounts, which is $12,000. Therefore, the answer is B.

Duncan Industries Sold $100,000 of 12 Percent Bonds on January