On January 1, 20X7 Thesante Metals Ltd issued a $100,000, 6%, 5-year bond for $91,889 to yield 8%. Interest is payable semi-annually. The interest expense and interest payable for the first year are closest to:
$\begin{array} { lrr }
& \text { Interest expense } & \text { Interest payable } \\end{array}$
a)$\begin{array} { lrr } && \$ 3,675 &&&&& \$ 3,000 \\end{array}$
b) $\begin{array} { lrr } && \$ 7351 &&&&& \$ 6,000 \\end{array}$
c) $\begin{array} { lrr } && \$ 7,418 &&&& \$ 6,000 \\end{array}$
d) $\begin{array} { lrr } && \$ 7,351 &&&& \$ 8,000 \\end{array}$

Question

On January 1, 20X7 Thesante Metals Ltd issued a $100,000, 6%, 5-year bond for $91,889 to yield 8%. Interest is payable semi-annually. The interest expense and interest payable for the first year are closest to:
 $\begin{array} { lrr } 
 & \text { Interest expense } & \text { Interest payable } \\end{array}$
a)$\begin{array} { lrr }  && \$ 3,675 &&&&& \$ 3,000 \\end{array}$
b) $\begin{array} { lrr } && \$ 7351 &&&&& \$ 6,000 \\end{array}$
c) $\begin{array} { lrr } && \$ 7,418 &&&& \$ 6,000 \\end{array}$
d) $\begin{array} { lrr } && \$ 7,351 &&&& \$ 8,000 \\end{array}$

Quizplus · Accepted Answer

The interest expense is calculated using the market rate of interest (8% annually, or 4% semi-annually) on the carrying amount of the bond at the beginning of the period. The initial carrying amount is $91,889. Thus, the first semi-annual interest expense is $91,889 * 4% = $3,675.50. Over a year, this amounts to $3,675.50 * 2 = $7,351. The interest payable is calculated using the stated rate of interest (6% annually, or 3% semi-annually) on the face value of the bond. The face value is $100,000, so the semi-annual interest payment is $100,000 * 3% = $3,000. Over a year, this amounts to $3,000 * 2 = $6,000. Therefore, the interest expense for the first year is closest to $7,351, and the interest payable is $6,000.

On January 1, 20X7 Thesante Metals Ltd Issued a $100,000 Interest expense Interest payable \begin{array} { lrr } & \text { Interest expense } & \text { Interest payable } \\\end{array}​ Interest expense ​ Interest payable ​

On January 1, 20X7 Thesante Metals Ltd Issued a $100,000 $\begin{array} { lrr } & \text { Interest expense } & \text { Interest payable } \\\end{array}$