210. Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?

Question

Quizplus · Accepted Answer

The bond interest expense for the end of the first year can be calculated as follows: 
- The annual interest payment is $500,000 x 7% = $35,000
- The effective interest rate is 9%, which means the bonds were issued at a discount of $500,000 - $431,850 = $68,150
- The first year's interest expense is the sum of the amortization of the discount ($68,150) and the annual interest payment ($35,000) for a total of $103,150
- To find the amortization of discount, we multiply the carrying value of the bond at the beginning of the year by the effective interest rate: 
Carrying value = $431,850
Amortization of discount = $431,850 x 9% = $38,867.50 
- Thus, the bond interest expense for the end of the first year is $38,867 (rounded to the nearest dollar).

Therefore, the best choice is B.