On January 1 of Year 1,Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000.The bonds pay interest semiannually on January 1 and July 1.The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,000 every six months. The amount of interest expense recognized by Drum Line Airways on the bond issue in Year 1 would be:

Question

Quizplus · Accepted Answer

Cash paid every six months = $3,500,000 * 7% * 6/12 = $122,500.
Discount amortization every six months = $10,000; ($122,500 + $10,000) * 2 = $265,000.

On January 1 of Year 1,Drum Line Airways Issued $3,500,000