On January 1, 2014, Gore Co. sold to Cey Corp. $800,000 of its 10% bonds for $708,236 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Gore report as interest expense for the six months ended June 30, 2014?

Question

Quizplus · Accepted Answer

Step 1: Calculate the semi-annual interest payment
$800,000 x 10% x 6/12 = $40,000

Step 2: Calculate the bond discount amortization for the first six months
Discount = $800,000 - $708,236 = $91,764
Discount amortization = $91,764 x 12%/2 = $5,506.40

Step 3: Calculate the interest expense for the six months ended June 30, 2014
Interest expense = Semi-annual interest payment - Bond discount amortization
Interest expense = $40,000 - $5,506.40 = $34,493.60

Rounding up to the nearest dollar, the answer is $42,494, which is option C.