A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:
A) $3,673.01.
B) $3,705.30.
C) $7,000.00.
D) $7,346.03.
E) $3,500.00.

Question

Quizplus · Accepted Answer

Under the effective interest method, the interest expense for the period is calculated as the carrying amount of the bond multiplied by the effective interest rate for the period. The effective interest rate is the market rate at the time of issue (7.5%) adjusted for the difference between the issue price and the par value of the bond. 
Carrying amount at the beginning of the period = $97,947
Interest expense for the period = $97,947 x (7.5% / 2) = $3,673.01 (rounded to the nearest cent)

A Company Issued 7%, 5-Year Bonds with a Par Value