On January 1, Year 1, Jones Company issued bonds with a $200,000 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 annual interest payment is $15,000 ($200,000 x 7.5%). The bond was issued at 97, so there is a $6,000 discount ($200,000 x 3%). Using straight-line amortization over 5 years, the annual amortization is $1,200 ($6,000 / 5). Therefore, the total interest expense is $16,200 ($15,000 + $1,200).

On January 1, Year 1, Jones Company Issued Bonds with a $200,000