Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31.Assuming Wayne issued the bond for 102½, the amount of interest expense appearing on the Year 1 income statement would be:
A) $34,500.
B) $36,000.
C) $37,500.
D) $15,000.

Question

Quizplus · Accepted Answer

The bonds were issued at 102.5% of face value, which means they were issued at a premium. The premium is $15,000 ($600,000 * 2.5%). The annual interest payment is $36,000 ($600,000 * 6%). The premium amortization per year using the straight-line method is $1,500 ($15,000 / 10 years). Therefore, the interest expense for Year 1 is $34,500 ($36,000 - $1,500).

Wayne Company Issued Bonds with a Face Value of $600,000