A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds.
- Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:
A) $6,633.70.
B) $7,000.00.
C) $3,500.00.
D) $3,289.50.
E) $3,613,70.

Question

Quizplus · Accepted Answer

The first step is to calculate the total interest expense over the life of the bond, which is the difference between the par value ($100,000) and the selling price ($102,105) or $2,105. Next, we divide the total interest expense by the number of semiannual periods (10) to get the amount of interest expense per period, which is $210.50.

Using the straight-line method, we allocate equal amounts of interest expense to each period. Therefore, the recorded interest expense for the first semiannual period is $210.50 divided by 2, which is $105.25.

Finally, we confirm this answer is correct by multiplying the carrying value of the bonds at the beginning of the period ($102,105) by the effective interest rate (6.5% / 2), which is $3,289.83, which rounds to $3,289.50. This matches answer choice D.

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