Downs Company issued $800,000 of 8%, 5-year bonds at 106, which pay interest annually.Assuming straight-line amortization, what is the total interest cost of the bonds?
A)$368,000
B)$272,000
C)$224,000
D)$320,000

Question

Quizplus · Accepted Answer

The total interest cost is calculated as the annual interest payment minus the premium amortization over the bond's life. The annual interest payment is $800,000 * 8% = $64,000. The premium is $800,000 * 6% = $48,000. The annual amortization of the premium is $48,000 / 5 = $9,600. Therefore, the total interest cost is ($64,000 - $9,600) * 5 = $272,000.

Downs Company Issued $800,000 of 8%, 5-Year Bonds at 106