Herman Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2009. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization.
What is the amount of interest expense Herman will show with relation to these bonds for the year ended December 31, 2010?

Question

Quizplus · Accepted Answer

The annual interest payment is $16,000 (8% of $200,000). The discount on the bonds is $11,500 ($200,000 - $188,500), which is amortized over 20 periods (10 years, semi-annual), resulting in $575 per period. For 2010, the total interest expense is $16,000 + $575 + $575 = $17,150.

Herman Company Received Proceeds of $188,500 on 10-Year, 8% Bonds