On January 2, 2017, Muslin Ltd.sold five year, 8% bonds with a face value of $900,000.Interest will be paid semi-annually on June 30 and December 31.The bonds were sold for $830,400 to yield 10%.Using the effective-interest method of amortization of bond discount or premium, interest expense for 2017 is

Question

Quizplus · Accepted Answer

Step 1: Calculate annual interest payment 
    Face value * Coupon rate = $900,000 * 8% = $72,000

Step 2: Calculate bond discount 
    Bond issue price = $830,400 
    Face value = $900,000 
    Bond discount = $900,000 - $830,400 = $69,600

Step 3: Calculate effective interest rate 
    PV of bond = $830,400 
    PMT = $72,000/2 = $36,000 (semi-annual interest payment) 
    FV = $900,000 
    n = 10 (number of semi-annual periods) 
    Using trial and error method, the effective interest rate is found to be 10.63%.

Step 4: Calculate interest expense for 2017 
    Interest expense for the first semi-annual period = $830,400 * 10.63% = $88,236 
    Amortization of bond discount for the first semi-annual period = $88,236 - $36,000 = $52,236 
    Interest expense for the second semi-annual period = ($830,400 + $69,600 - $52,236) * 10.63% = $22,080 
    Total interest expense for 2017 = $52,236 + $22,080 = $74,316 (rounded to nearest dollar)

Therefore, the best answer is C.