On January 2, 2019, Kangaroo Convenience Stores issued 10-year, $5,000,000, zero-coupon bonds at 75. What is the amount of interest expense recorded in 2019 using the straight line amortization method?

Question

Quizplus · Accepted Answer

To determine the amount of interest expense recorded in 2019 using the straight-line amortization method for the zero-coupon bonds issued by Kangaroo Convenience Stores, we need to follow these steps:
1. Calculate the initial amount at which the bonds were issued:
The bonds were issued at 75, which means they were issued at 75% of their face value. So, the initial amount received by Kangaroo Convenience Stores is:
$5,000,000 (face value) * 75% = $3,750,000
2. Determine the total amount of discount on the bonds:
The discount on the bonds is the difference between the face value and the amount at which they were issued:
$5,000,000 (face value) - $3,750,000 (issue price) = $1,250,000
3. Calculate the annual amortization of the discount:
Since the bonds are zero-coupon, they do not pay periodic interest. Instead, the interest expense is recognized through the amortization of the discount over the life of the bonds. Using the straight-line method, the discount is amortized evenly over the bond term, which is 10 years in this case:
$1,250,000 (total discount) / 10 years = $125,000 per year
4. Determine the interest expense for 2019:
Using the straight-line method, the interest expense for 2019 is the annual amortization amount:
Interest expense for 2019 = $125,000
Therefore, the correct answer is:
d. $125,000
This is the amount of interest expense that Kangaroo Convenience Stores would record in 2019 using the straight-line amortization method for the zero-coupon bonds.

On January 2, 2019, Kangaroo Convenience Stores Issued 10-Year, $5,000,000