A company issued 18-year,6% bonds with a par value of $750,000.The company received $761,736 cash for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:
A)$22,174
B)$22,826
C)$22,500
D)$23,152
E)$21,848

Question

Quizplus · Accepted Answer

The annual interest on the bonds is 6% of $750,000, which is $45,000. This interest will be paid in two semiannual payments, so the interest expense for each period will be $22,500 ($45,000/2).

To calculate the amount of bond premium, we subtract the par value of the bonds from the amount of cash received:

$761,736 - $750,000 = $11,736

Since the bonds have an 18-year life, there will be 36 semiannual interest periods (18 years x 2 semiannual periods per year). To amortize the bond premium evenly over these periods, we need to divide the premium by the number of periods:

$11,736 / 36 = $326

This means that the bond premium will be reduced by $326 every six months. The interest expense for the first semiannual period will consist of the $22,500 in bond interest plus $326 in bond premium amortization, for a total of $22,826.

Therefore, the correct answer is A) $22,174.

A Company Issued 18-Year,6% Bonds with a Par Value of $750,000.The