Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31. Assuming Weller issued the bond for $431,940, the amount of interest expense appearing on the Year 3 income statement would be:
A) $33,649.
B) $20,000.
C) $34,120.
D) $46,350.

Question

Quizplus · Accepted Answer

$431,940 × 8% = $34,555 interest expense in Year 1; $400,000 × 10% = $40,000 interest payment; $40,000 − $34,555 = $5,445 amortization in Year 1; $431,940 − $5,445 = $426,495 carrying value on December 31, Year 1; $426,495 × 8% = $34,120 interest expense in Year 2; $40,000 − $34,120 = $5,880 amortization in Year 2; $426,495 − $5,880 = $420,615 carrying value on December 31, Year 2; $420,615 × 8% = $33,649 interest expense in Year 3

Weller Company Issued Bonds with a Face Value of $400,000