On January 1, Year 1, Jones Company issued bonds with a $220,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method. What is the amount of interest expense shown on Jones' income statement for the year ending December 31, Year 1?

Question

Quizplus · Accepted Answer

The bonds were issued at 97, meaning they were issued at a discount. The discount is $220,000 * 3% = $6,600. Using the straight-line method, the annual amortization of the discount is $6,600 / 5 = $1,320. The cash interest payment is $220,000 * 7.5% = $16,500. Therefore, the total interest expense is $16,500 + $1,320 = $17,820.

On January 1, Year 1, Jones Company Issued Bonds with a $220,000