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 $97,946.80 cash for the bonds. Using the effective interest method, the amount of interest expense for the second semiannual interest period is:
A) $3,679.49.
B) $7,000.00.
C) $3,673.01.
D) $7,346.03.
E) $3,500.00.

Question

Quizplus · Accepted Answer

The interest expense for the second semiannual period is calculated using the effective interest rate on the carrying amount of the bond. The carrying amount after the first period is $97,946.80 plus the first period's interest expense minus the cash interest payment. The interest expense for the second period is then calculated as 3.75% (half of 7.5%) of this new carrying amount.

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