Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The amount of cash interest paid in 2014 on the bonds is
A)$14,458.
B)$16,000.
C)$17,542.
D)$20,000.

Question

Quizplus · Accepted Answer

The face value of the bonds is $200,000 and they were sold at a discount of $24,578, so the company received $200,000 - $24,578 = $175,422 in cash from the bond sale.
The coupon rate on the bonds is 8%, so the company will pay interest of 8% x $200,000 = $16,000 each year.
The bonds were sold on January 1, 2014, so the company will only have to pay interest for the portion of the year from January 1 to December 31, 2014.
Therefore, the amount of cash interest paid in 2014 on the bonds is $16,000 x (365/366) = $15,973 (using actual days in 2014, which had 365 days in a non-leap year).
The closest choice to this value is B) $16,000, which is the correct answer.

Hooker Company Sells $200,000 of Ten-Year,8% Bonds to Yield 10