A company issued 10-year, 8% bonds with a par value of $1,000,000. The company received
$980,000 upon issuance. Using the straight-line method, the amount of interest expense for the first semi-annual interest period is:

Question

Quizplus · Accepted Answer

The correct answer is A because the straight-line method allocates the discount evenly over the life of the bond. In this case, the discount is $20,000 ($1,000,000 - $980,000) and the bond has a 10-year life. Therefore, the semi-annual interest expense is $20,000 / 20 = $1,000. The total interest expense for the first semi-annual interest period is $1,000 + $40,000 = $41,000.

A Company Issued 10-Year, 8% Bonds with a Par Value