On January 1, Elias Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 10 years from now. Elias records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 of the first year is
A) $5,000
B) $5,200
C) $5,800
D) $5,400

Question

Quizplus · Accepted Answer

The bond discount is the difference between the face value of the bond ($50,000) and the selling price ($46,000) which is $4,000. Since the bonds pay interest semiannually, the annual interest payment is 10% x $50,000 = $5,000.

To calculate the bond interest expense for the first year, we need to amortize the bond discount. Since the maturity of the bond is 10 years, there will be 20 semiannual periods. Using straight-line amortization, we can allocate the bond discount evenly over these periods, so the annual amortization amount is $4,000 ÷ 10 years = $400 per year.

The bond interest expense for the first year will be the sum of the semiannual interest payments and the amortized bond discount for the year, which is:
($5,000 ÷ 2) + $400 = $2,500 + $400 = $2,900
Since we want the annual expense, we multiply by 2, giving us:
$2,900 x 2 = $5,800

Therefore, the correct answer is D) $5,400.

On January 1, Elias Corporation Issued 10% Bonds with a Face