On May 1, 2016, Plotter, Inc., issued $30,000 of ten-year, 12% bonds payable dated January 1, 2016. The cash received amounted to $29,808. The bonds pay interest semiannually. Potter's fiscal year ends on June 30, 2016. What amount of interest expense should be reported on the income statement prepared on June 30, 2016, assuming straight-line amortization?
A) $603.20
B) $669.60
C) $549.60
D) $609.60

Question

Quizplus · Accepted Answer

The correct answer is A.The bonds were issued on January 1, 2016, and the fiscal year ends on June 30, 2016. This means that interest expense for six months needs to be recognized. The semiannual interest payment is $30,000 x 12% / 2 = $1,800. The straight-line amortization of the discount is $29,808 - $30,000 = $192 over the 10-year life of the bonds, or $192 / 20 = $9.60 per six-month period. Therefore, the total interest expense for the six months ended June 30, 2016, is $1,800 + $9.60 = $1,809.60.