On January 1, 2014, Zing Services issued $165,000 of 6-year bonds with a stated rate of 12%. The market rate at time of issue was 11%, so the bonds were issued with a premium and sold for $172,110. Zing uses the effective-interest method to amortize bond premium. Semiannual interest payments are made on June 30 and December 31 of each year. How much Interest Expense will be recorded when the first interest payment is made?

Question

Quizplus · Accepted Answer

First, we need to calculate the premium on the bond:
Premium = Issue Price - Face Value
Premium = $172,110 - $165,000
Premium = $7,110

Next, we need to calculate the semiannual interest payment:
Interest Payment = Stated Rate * Face Value / 2
Interest Payment = 12% * $165,000 / 2
Interest Payment = $9,900

To calculate the interest expense, we first need to calculate the bond carrying value on the date of the first interest payment:
Carrying Value = Issue Price - Amortization of Premium
Carrying Value = $172,110 - ($7,110 / 12) = $171,104

Finally, we can calculate the Interest Expense:
Interest Expense = Effective Interest Rate * Carrying Value
Effective Interest Rate = (1 + Market Rate / 2) ^ 2 - 1
Effective Interest Rate = (1 + 0.11 / 2) ^ 2 - 1 = 0.1121 or 11.21%
Interest Expense = 11.21% * $171,104 = $19,234.34 (for the full year)
Since this is a semiannual payment, we divide by 2 to get the interest expense for the first payment:
Interest Expense = $19,234.34 / 2 = $9,617.17
Therefore, the answer is B) $9,466.

On January 1, 2014, Zing Services Issued $165,000 of 6-Year