On January 1,2014 when the effective interest rate was 14%,a company issued bonds with a maturity value of $1,000,000.The stated rate of interest is 12%,the bonds pay interest semi-annually and sold for $893,640.The amount of bond discount amortized on July 1,2014 is approximately
A)$1,000.
B)$2,555.
C)$2,000.
D)$5,110.

Question

Quizplus · Accepted Answer

First, we need to calculate the annual interest payment using the stated rate of 12% and the maturity value of $1,000,000:

Annual interest payment = 0.12 x $1,000,000 = $120,000

Since the bonds pay interest semi-annually, the semi-annual interest payment is:

Semi-annual interest payment = $120,000 / 2 = $60,000

Next, we need to calculate the bond discount:

Bond discount = $1,000,000 - $893,640 = $106,360

We can now use the effective interest rate of 14% to amortize the bond discount for the first semi-annual interest payment period:

Amortization of bond discount = $106,360 x 0.5 x (0.14 / 2) = $2,555

Therefore, the amount of bond discount amortized on July 1, 2014 is approximately $2,555, which corresponds to choice B.

On January 1,2014 When the Effective Interest Rate Was 14%,a