A corporation issues $500,000, 10%, 5-year bonds on January 1, 2010 for $479,000. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight- line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2010 is

Question

Quizplus · Accepted Answer

The bond discount is $500,000 - $479,000 = $21,000.
Since the bond has a 5-year term and pays interest semiannually, it has 10 (5 x 2) periods.
The bond discount of $21,000 is amortized evenly over these 10 periods, at a rate of $2,100 per period ($21,000 ÷ 10).
Therefore, the bond interest expense to be recognized on July 1, 2010 is the sum of the bond's stated interest of $25,000 ($500,000 x 10% x 6/12) and the amortization of the bond discount of $2,100. 
Total interest expense = $25,000 + $2,100 = $27,100.

Hence, the best choice is C) $27,100.

A Corporation Issues $500,000, 10%, 5-Year Bonds on January 1