On January 1, 2014, Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,077,250 to yield 10%. Using the effective-interest method of amortization, interest expense for 2014 is

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Interest expense is calculated using the effective interest rate on the carrying amount of the bonds at the beginning of the period. The bonds were sold to yield 10% annually, or 5% semiannually. The carrying amount at the beginning of the period is the issue price, $1,077,250. Thus, the interest expense for the first six months is 5% of $1,077,250, which is $53,862.50. For the second six months, the carrying amount is adjusted for the amortization of the bond premium. The total interest expense for the year is the sum of the two semiannual interest expenses, which is more than the stated interest ($60,000) due to the effective-interest method, leading to the correct answer of $107,419.