Park Enterprises issued bonds with a term of 5 years and a face value of $500,000,receiving cash of $508,000.The bonds pay interest once a year,with an annual rate of 7%.Assuming straight-line amortization,the amount of interest expense for the first year would be $31,600.

Question

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The interest expense for the first year includes both the cash interest payment and the amortization of the premium. The cash interest payment is $35,000 (7% of $500,000), and the premium amortization is $1,600 ($8,000 premium divided by 5 years), making the total interest expense $33,400, not $31,600.

Park Enterprises Issued Bonds with a Term of 5 Years