Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds mature in ten years. The bonds were issued at $48,000. Gammel Company uses the straight-line method of amortization. How much is the annual interest expense?
A) $4,700.
B) $4,300.
C)$4,500.
D)$4,680.

Question

Quizplus · Accepted Answer

The annual interest payment is $4,500 ($50,000 x 9%). The discount on the bonds is $2,000 ($50,000 - $48,000), which is amortized over 10 years, resulting in an annual amortization of $200 ($2,000 / 10). Therefore, the annual interest expense is $4,500 + $200 = $4,700.

Gammell Company Issued $50,000 of 9% Bonds with Annual Interest