On January 1, 2007, Nott Co.sold to Day Corp.$400,000 of its 10% bonds for $354,118 to yield 12%.Interest is payable semiannually on January 1 and July 1.What amount should Nott report as interest expense for the six months ended June 30, 2007?

Question

Quizplus · Accepted Answer

First, we need to calculate the semiannual interest payment:
$400,000 * 10% / 2 = $20,000
Next, we need to calculate the premium amortization for the first six months:
Premium amortization = Bond premium * (Effective interest rate / 2)
Bond premium = $400,000 - $354,118 = $45,882
Effective interest rate = 12% / 2 = 6%
Premium amortization = $45,882 * 6% = $2,753
Finally, we can calculate the interest expense for the six months ended June 30, 2007:
Interest expense = Semiannual interest payment - Premium amortization
= $20,000 - $2,753
= $17,247
Therefore, the correct answer is C) $21,247.