On January 1, Year 1, The Hanover Corporation issued $70,500 of 8%, 5-year bonds at 97. Hanover uses the straight-line method of bond discount amortization. The interest payments are due on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1?

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Quizplus · Accepted Answer

The interest expense on the income statement includes the cash interest payment plus the bond discount amortization. The cash interest payment is $70,500 x 8% = $5,640. The bond was issued at 97, indicating a 3% discount, so the total discount is $70,500 x 3% = $2,115. This discount is amortized over 5 years, so the annual amortization is $2,115 / 5 = $423. Therefore, the total interest expense is the cash interest payment of $5,640 plus the annual amortization of the discount of $423, totaling $6,063.

On January 1, Year 1, the Hanover Corporation Issued $70,500