Pan Company received proceeds of $188000 on 10-year 6% bonds issued on January 1 2016. The bonds had a face value of $200000 pay interest annually on December 31 and have a call price of 101. Pan uses the straight-line method of amortization. What is the amount of interest expense Pan will show with relation to these bonds for the year ended December 31 2017?

Question

Quizplus · Accepted Answer

- The annual interest payment on the bonds is 6% x $200,000 = $12,000.
- The premium paid on the bonds is $188,000 - $200,000 = $12,000.
- This premium is amortized over the 10-year life of the bonds using the straight-line method, which means that $1,200 of the premium is amortized each year ($12,000 ÷ 10 years).
- Therefore, the interest expense that Pan will show on its 2017 income statement is $12,000 + $1,200 = $13,200.
- However, since the bonds were issued on January 1, 2016, Pan only owned them for a portion of 2016. The amount of interest expense that Pan will show in 2017 will only be for the portion of the year that Pan owned the bonds in 2016.
- Since the bonds pay interest annually on December 31, Pan would have received one year's worth of interest on December 31, 2016, which is $12,000.
- Therefore, the amount of interest expense that Pan will show on its 2017 income statement is actually $13,200 - $12,000 = $1,200 lower, which is $12,000.

Therefore, the best choice is C, $13,200.

Pan Company Received Proceeds of $188000 on 10-Year 6% Bonds