Stable Company issued $500,000 of 6%, 5-year bonds at 98, with interest paid annually.Assuming straight-line amortization, what is the total interest cost of the bonds?

Question

Quizplus · Accepted Answer

The total interest cost of the bonds includes the stated interest plus the amortization of the discount. The stated interest is $500,000 * 6% * 5 = $150,000. The discount on the bonds is $500,000 * (100% - 98%) = $10,000, which is amortized over 5 years, adding $2,000 per year to the interest cost. Over 5 years, this adds up to $10,000. Therefore, the total interest cost is $150,000 + $10,000 = $160,000.

Stable Company Issued $500,000 of 6%, 5-Year Bonds at 98