On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.Alpha uses the effective interest method of amortization.On its income statement for the year ended December 31,2011,Alpha will show interest expense of ________.

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The annual interest payment on the bonds is $50,000 ($1,000,000 x 5%). However, because the market rate of interest is higher than the coupon rate, the bonds were sold at a discount (less than face value). This means that the effective interest rate that Alpha Company will pay on these bonds is higher than 5%. Therefore, the interest expense on the income statement will be more than $50,000. Without knowing the exact discount at which the bonds were sold, it is not possible to determine the exact interest expense, but it will be more than $50,000.

On January 1,2011,Alpha Company Issued $1,000,000 of 5%,20-Year Bonds to Buy