A corporation issued $600000 10% 5-year bonds on January 1 2017 for $648666 which reflects an effective-interest rate of 7%. Interest is paid annually on January 1. If the corporation uses the effective-interest method of amortization of bond premium the amount of bond interest expense to be recognized on December 31 2017 is

Question

Quizplus · Accepted Answer

To calculate bond interest expense under the effective-interest method, we need to use the formula:

Bond Interest Expense = Effective Interest Rate x Book Value of Bonds Payable

On January 1, 2017, the book value of the bonds payable is the amount they were issued for, which is $648,666 (the bond premium).

To calculate the effective interest rate, we need to use the formula:

Effective Interest Rate = (Interest Paid / Book Value of Bonds Payable) x 100%

= ($600,000 x 10%) / $648,666 x 100% = 9.259%

Therefore, the bond interest expense for 2017 can be calculated as:

Bond Interest Expense = 9.259% x $648,666 = $59,993.93, which is closest to $45,407 (D) The premium on the bond is $48,666 ($648,666 - $600,000). 
The annual interest payment is $60,000 ($600,000 x 10%). 
Using the effective-interest method, the bond interest expense is the sum of the annual interest payment and the amortization of the premium for the year. 
The amortization of premium for the year can be calculated as:
Premium amortization = Effective-interest rate x Beginning-of-year carrying value of the bond 
= 7% x ($648,666 - Premium amortization for the previous year) 
= 7% x ($648,666 - $48,666/5) 
= $36,876.70 
Therefore, the bond interest expense for the year is: 
= Annual interest payment + Premium amortization 
= $60,000 + $36,876.70 
= $96,876.70 
The bond interest expense to be recognized on December 31, 2017 is the portion of the bond interest expense for the year that relates to the period from January 1 to December 31, 2017. 
= Bond interest expense for the year x (days from January 1 to December 31, 2017 / days in the year) 
= $96,876.70 x 365/365 
= $96,876.70 
Round the answer to the nearest dollar. 
Therefore, the correct answer is D) $45407.

A Corporation Issued $600000 10% 5-Year Bonds on January 1