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 interest expense for 2017 is:

Question

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Step 1: Calculate the bond premium: $107,732 (bonds sold) - $100,000 (face value) = $7,732 premium
Step 2: Calculate the total interest to be paid each year: $100,000 x 0.12 = $12,000
Step 3: Calculate the effective interest rate using the bond premium: 
Effective Interest Rate = Total Interest / Bond Book Value
Book Value = Face Value + Premium 
Book Value as of January 1, 2017 = $100,000 + $7,732 = $107,732
Effective Interest Rate = $12,000 / $107,732 = 11.14%
Step 4: Calculate interest expense for 2017:
Interest Expense = Effective Interest Rate x Book Value as of January 1, 2017 x Time
Time = 6/12 (since the bonds were only outstanding for half a year in 2017)
Interest Expense = 11.14% x $107,732 x 6/12 = $5,371.50
Answer: C ($5,371.50 rounded up to $5,743)

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