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: $\begin{array}{lll}&10\%&9\%\
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$
The amount of bond interest expense for Year 2 is
A)$450,000.
B)$464,578.
C)$500,000.
D)$535,422.

Question

Quizplus · Accepted Answer

Interest expense is calculated using the effective interest rate method. The carrying amount of the bonds at the beginning of Year 2 is multiplied by the effective yield (9%). The carrying amount at the beginning of Year 2 is not directly given, but it can be inferred from the context that it is more than the face value because the bonds were sold at a yield lower than the coupon rate, indicating a premium. The exact carrying amount calculation involves detailed steps not provided in the question, but the correct interest expense aligns with the effective yield approach, which is typically higher than the coupon payment in such scenarios.

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