On January 1, Year 1, Hanover Corporation issued bonds with a $70,500 face value, a stated rate of interest of 8%, and a 5-year term 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

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The bonds were issued at a discount (97% of face value), so the issue price is $68,385 ($70,500 * 0.97). The discount is $2,115 ($70,500 - $68,385). Using the straight-line method, the annual amortization of the discount is $423 ($2,115 / 5 years). The cash interest payment is $5,640 ($70,500 * 8%). Therefore, the total interest expense is $6,063 ($5,640 + $423).

On January 1, Year 1, Hanover Corporation Issued Bonds with a $70,500