On January 1, 2017, Lace Ltd.sold five year, 12% bonds with a face value of $500,000.Interest will be paid semi-annually on June 30 and December 31.The bonds were sold for $538,500 to yield 10%.Using the effective-interest method of amortization of bond discount or premium, interest expense for 2017 is

Question

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First, calculate the annual interest payment using the face value and coupon rate:

$500,000 x 0.12 = $60,000

Next, calculate the semi-annual interest payment:

$60,000 / 2 = $30,000

Calculate the bond discount:

$538,500 - $500,000 = $38,500

Using the effective-interest method, the bond discount is amortized over the life of the bond using the effective interest rate, which is 10%.

For the first interest payment on June 30, 2017:

Interest expense = $500,000 x 10% = $50,000 
Amortization of bond discount = ($538,500 - $500,000) x 10% / 2 = $1,925

Total interest expense for the first payment = $50,000 + $1,925 = $51,925

For the second interest payment on December 31, 2017:

Interest expense = ($500,000 + $38,500) x 10% = $53,850 
Amortization of bond discount = ($538,500 - $500,000 - $1,925) x 10% / 2 = $1,771

Total interest expense for the second payment = $53,850 + $1,771 = $55,621

Therefore, the total interest expense for 2017 is $51,925 + $55,621 = $107,546, or $53,773 per semi-annual period. Rounded to the nearest dollar, the answer is (B) $53,696.