On January 1, 2019, Kaiser Permanente issued $2,000,000 of 8% bonds at par. These bonds are due in 10 years with interest payable semi-annually on June 30 and December 31. What is the amount of the interest expense in 2019 assuming the use of the effective interest amortization method?

Question

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The question states that Kaiser Permanente issued $2,000,000 of 8% bonds at par on January 1, 2019. The bonds have a 10-year maturity with interest payable semi-annually on June 30 and December 31. The effective interest amortization method is not relevant in this case because the bonds were issued at par, meaning the book value of the bonds equals the face value. Therefore, the interest expense is simply the stated interest rate times the face value of the bonds.
To calculate the annual interest expense, you would use the following formula:
Annual Interest Expense = Face Value of Bonds x Stated Interest Rate
Given that the face value of the bonds is $2,000,000 and the stated interest rate is 8%, the annual interest expense is:
Annual Interest Expense = $2,000,000 x 0.08 = $160,000
Since the interest is paid semi-annually, this amount is paid in two installments of $80,000 each on June 30 and December 31. However, the question asks for the total interest expense in the year 2019, which would include both payments. Therefore, the total interest expense for 2019 is:
Total Interest Expense for 2019 = $80,000 (June 30 payment) + $80,000 (December 31 payment) = $160,000
The correct answer is:
b. $160,000

On January 1, 2019, Kaiser Permanente Issued $2,000,000 of 8