Smith Corporation issues $400,000,10%,five-year bonds at 95.The total interest expense over the life of the bonds is:

Question

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The total interest expense over the life of the bonds is calculated by adding the cash interest payments to the discount on the bonds. The bonds were issued at 95, meaning they were issued at a discount (95% of face value). The face value is $400,000, so they were issued for $400,000 * 95% = $380,000. The cash interest payments over five years are $400,000 * 10% * 5 = $200,000. The discount on the bonds, which is also part of the interest expense, is the difference between the face value and the issued price, which is $400,000 - $380,000 = $20,000. Therefore, the total interest expense is $200,000 (cash interest payments) + $20,000 (discount) = $220,000.

Smith Corporation Issues $400,000,10%,five-Year Bonds at 95