A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2015, using straight-line amortization?
A) $1,026,805
B) $780,000
C) $784,596
D) $789,896

Question

Quizplus · Accepted Answer

The straight-line amortization method spreads the bond discount evenly over the life of the bond. The annual discount amortization is ($10,000,000 - $9,802,072) / 20 = $9,896. The annual interest expense is the cash interest payment ($10,000,000 * 7.8% = $780,000) plus the annual discount amortization ($9,896), totaling $789,896.

A Company Issues $10,000,000, 7