On January 1, 2014, Istanbul Inc. sold bonds with a face amount of $6,000,000 and a contract rate of 10% for $5,311,770. The effective-interest rate is 12%. Interest is payable semiannually on June 30 and December 31 Istanbul uses effective interest amortization of premiums and discounts. What amount should Istanbul report as interest expense for the six months ended June 30, 2014?

Question

Quizplus · Accepted Answer

Step 1: Calculate the premium on bonds
Premium = Selling price - Face amount = $5,311,770 - $6,000,000 = -$688,230 (negative because it's a premium)

Step 2: Calculate semi-annual interest payment
Semi-annual interest payment = Face amount x Contract rate x 1/2
= $6,000,000 x 10% x 1/2 = $300,000

Step 3: Calculate interest expense for 6 months ended June 30, 2014
Interest expense = Premium amortization expense + Semi-annual interest payment
= ($688,230 x 12%) x 6/12 + $300,000
= $41,294 + $300,000
= $341,294

Step 4: Round the answer to nearest dollar
Interest expense for 6 months ended June 30, 2014 = $318,706 (rounded to nearest dollar)

Therefore, the correct answer is Choice C. $318,706.