Shakey Company issued $500000 of 6% 5-year bonds at 98 with interest paid annually. Assuming straight-line amortization what is the total interest cost of the bonds?

Question

Quizplus · Accepted Answer

The total interest cost of the bonds includes the stated interest plus the discount amortization. The stated interest is $500,000 * 6% * 5 = $150,000. The discount on the bonds is $500,000 * (100% - 98%) = $10,000. This discount is amortized over 5 years, adding $2,000 per year to the interest expense. Therefore, over 5 years, the total additional interest cost due to the discount is $2,000 * 5 = $10,000. The total interest cost is $150,000 + $10,000 = $160,000.

Shakey Company Issued $500000 of 6% 5-Year Bonds at 98