Victor Company issued bonds with a $450,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year.The amount of interest expense appearing on the December 31, Year 3 income statement would be:
A) $31,500.
B) $27,000.
C) $25,650.
D) $22,500.

Question

Quizplus · Accepted Answer

The interest expense includes the cash interest payment and the amortization of the discount. The cash interest payment is $450,000 * 6% = $27,000. The discount on the bonds is $450,000 * (100% - 95%) = $22,500. The annual amortization of the discount is $22,500 / 5 = $4,500. Therefore, the total interest expense is $27,000 + $4,500 = $31,500.

Victor Company Issued Bonds with a $450,000 Face Value and a 6