On January 2,2017,Garage Master Construction,Inc.issued $500,000,ten-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.The interest expense on the bonds at June 30,2017,is

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Quizplus · Accepted Answer

To calculate the interest expense, we need to use the effective interest rate method. 
Step 1: Calculate the semi-annual interest payment:
Face Value x Face Rate x Time = $500,000 x 8% x 6/12 = $20,000
Step 2: Calculate the present value of the bond:
PMT x (1-(1/(1+r)^n))/r + FV/(1+r)^n = $574,540
$20,000 x (1-(1/(1+0.03)^20))/0.03 + $500,000/(1+0.03)^20 = $574,540
$345,472.20 + $190,067.80 = $535,540 (rounded)
Step 3: Calculate the interest expense for the first six months:
Beginning Balance x Interest Rate = $535,540 x 3% = $16,067.20 (rounded)
Therefore, the interest expense at June 30, 2017, is $16,067.20 x 2 = $32,134.40 (rounded) for the whole year, or $16,067.20 for the first six months. But since only the interest expense for the first six months is being asked, the answer is B) $17,236.