Presented here is a partial amortization schedule for Courtney Company who sold $200,000, five year 10% bonds on January 1, 2010 for $208,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (iii)?
A) $4,000
B) $8,000
C) $1,600
D) $800

Question

Presented here is a partial amortization schedule for Courtney Company who sold $200,000, five year 10% bonds on January 1, 2010 for $208,000 and uses annual straight-line amortization.  Which of the following amounts should be shown in cell (iii)?
A) $4,000 
B) $8,000 
C) $1,600 
D) $800

Quizplus · Accepted Answer

The annual interest expense is calculated by multiplying the carrying value of the bond at the beginning of each year by the stated interest rate of 10%. Since the bonds were sold for $208,000 and using straight-line amortization, the carrying value at the beginning of each year will increase by $1,600 ($8,000/5). Therefore, the interest expense in year 1 should be $20,800 ($208,000*10%), and in year 2 it should be $19,200 ($208,000-$1,600*1)*10%. The difference between these two amounts ($1,600) represents the amount of bond discount that has been amortized in year 2. Therefore, the answer is C) $1,600.

Presented Here Is a Partial Amortization Schedule for Courtney Company