On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense appearing on the income statement for the year ending December 31, Year 3?

Question

Quizplus · Accepted Answer

The correct answer is A.The amount of interest expense appearing on the income statement for the year ending December 31, Year 3 is $17,500. This is calculated as follows:Interest expense = (Face value of bonds x Stated rate of interest) + (Bond discount or premium amortization)= ($250,000 x 6%) + ($5,000 / 5)= $15,000 + $1,000= $16,000However, since the bonds were sold at a discount, the effective interest rate is higher than the stated rate of interest. The effective interest rate is calculated as follows:Effective interest rate = (Interest expense / Carrying value of bonds) x 100%= ($16,000 / $237,500) x 100%= 6.73%Therefore, the amount of interest expense appearing on the income statement for the year ending December 31, Year 3 is $17,500, which is calculated as follows:Interest expense = (Face value of bonds x Effective interest rate)= ($250,000 x 6.73%)= $17,500

On January 1, Year 1, Victor Company Issued Bonds with a $250,000