A ten-year bond issue of $400,000, interest rate of 9% paid semiannually, is sold for $440,000 when the market rate is 8%. The bonds were not sold between interest dates and the straight-line amortization method is used. The bond interest expense for the first interest payment would be

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The bond interest expense is calculated by taking the cash interest payment minus the amortization of the premium. The cash interest payment is $400,000 * 9% / 2 = $18,000. The premium is $440,000 - $400,000 = $40,000, and the amortization per period is $40,000 / 20 = $2,000. Therefore, the bond interest expense is $18,000 - $2,000 = $16,000.

A Ten-Year Bond Issue of $400,000, Interest Rate of 9