On January 1, Year 1, Hanover Corporation issued bonds with a $42,750 face value, a stated rate of interest of 8%, and a 5-yearterm to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1?

Question

Quizplus · Accepted Answer

The interest expense includes the cash interest payment and the amortization of the bond discount. The cash interest payment is $42,750 * 8% = $3,420. The bond discount is $42,750 * (100% - 97%) = $1,282.50, amortized over 5 years, which is $1,282.50 / 5 = $256.50 per year. Therefore, the total interest expense is $3,420 + $256.50 = $3,676.50, rounded to $3,677.

On January 1, Year 1, Hanover Corporation Issued Bonds with a $42,750