On January 1, Year 1, Denver Company issued bonds with a face value of $81,000, a statedrate of interest of 8%,and a 5-year term to maturity. The bonds were sold at 102.5. Denver uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense during Year 1?

Question

Quizplus · Accepted Answer

The first step is to calculate the amount of bond premium:

Bond Premium = (Sale Price - Face Value) = ($81,000 x 102.5%) - $81,000 = $83,025 - $81,000 = $2,025

Next, we need to calculate the annual amortization of bond premium:

Annual Amortization = Bond Premium / Years to Maturity = $2,025 / 5 = $405

Finally, we can calculate the amount of interest expense for Year 1:

Interest Expense = (Face Value x Stated Rate) + Amortization of Premium
Interest Expense = ($81,000 x 8%) + $405 = $6,480 + $405 = $6,885

Therefore, the answer is B ($6,075).

On January 1, Year 1, Denver Company Issued Bonds with a Face