The Ness Company sells $5,000,000 of five-year,10% bonds at the start of the year.The bonds have an effective yield of 9%.Present value factors are below: $$\begin{array} { l c c }
& \underline { \mathbf { 1 0 } \% } & \underline { \mathbf { 9 \% } } \
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$$
The bond interest expense for Year 1 is
A)$467,503.
B)$500,000.
C)$532,497.
D)$538,895.

Question

The Ness Company sells $5,000,000 of five-year,10% bonds at the start of the year.The bonds have an effective yield of 9%.Present value factors are below: $$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 } \% } & \underline { \mathbf { 9 \% } } \
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$$
The bond interest expense for Year 1 is
A)$467,503.
B)$500,000.
C)$532,497.
D)$538,895.

Quizplus · Accepted Answer

The bond interest expense for Year 1 is calculated using the effective interest rate method. This involves multiplying the carrying amount of the bonds at the beginning of the period by the effective interest rate. Since the bonds were issued at a premium (effective yield of 9% vs. coupon rate of 10%), the carrying amount initially is more than the face value. However, without the exact issue price, we can estimate the first year's interest expense by calculating the interest on the face value at the effective rate. $$ \$5,000,000 \times 9\% = \$450,000 $$However, none of the provided options match this calculation directly, suggesting a need for a more detailed calculation that includes the premium at which the bonds were sold. The correct calculation involves determining the present value of the bond's cash flows (interest and principal) at the effective interest rate (9%) and then applying the effective interest rate to this amount to find the interest expense. The initial step is missing in the provided information, making a direct calculation impossible with the given data. The correct answer, based on the options provided and typical bond accounting principles, would involve recognizing that the actual calculation deviates from the simple interest calculation and involves more complex factors, including the bond's issuance price and amortization of premium or discount. Given the options and without the exact issuance price, the selection is based on understanding that the interest expense is calculated using the effective rate on the carrying amount, which is not directly provided.

The Ness Company Sells $5,000,000 of Five-Year,10% Bonds at the Start