Herman Company received proceeds of $565,500 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of $600,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization. What is the amount of interest expense Herman will show with relation to these bonds for year ended December 31, 2014?

Question

Quizplus · Accepted Answer

The annual interest expense includes the cash interest payment and the amortization of the bond discount. The cash interest payment is $600,000 * 8% = $48,000 annually. The bond discount is $600,000 - $565,500 = $34,500, which is amortized over 10 years, resulting in $3,450 per year. Therefore, the total interest expense is $48,000 + $3,450 = $51,450.

Herman Company Received Proceeds of $565,500 on 10-Year, 8% Bonds