On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. Assuming Wayne issued the bond for 102.5, what is the amount of interest expense that will be reported on the income statement for the year ending December 31, Year 1?

Question

Quizplus · Accepted Answer

The bonds were issued at 102.5% of face value, which means they were issued at a premium. The premium is $600,000 * 2.5% = $15,000. The annual premium amortization using the straight-line method is $15,000 / 10 = $1,500. The cash interest payment is $600,000 * 6% = $36,000. Therefore, the interest expense is $36,000 - $1,500 = $34,500.

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