ABC Corporation issued $600,000, 10%, 5-year bonds on January 1, 2012 for $612,000 when the market interest rate was 8%. Interest is paid semiannually on January 1 and July 1. The corporation uses the effective-interest method to amortize bond premium. The amount of bond interest expense recognized on July 1, 2012 is:

Question

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First, we need to calculate the amount of annual interest the bondholders will receive:

$600,000 x 10% = $60,000 per year

Since interest is paid semiannually, the bondholders will receive $30,000 on January 1 and $30,000 on July 1.

Next, we need to calculate the amount of interest expense that ABC Corporation will recognize on July 1 using the effective-interest method. This method calculates interest expense based on the carrying value of the bonds and the market interest rate at the time of issuance.

The carrying value of the bonds on July 1, 2012 will be:

Carrying value on January 1, 2012 = $612,000 
Amortization of bond premium for first 6 months = $612,000 x (8% ÷ 2) = $24,480 
Carrying value on July 1, 2012 = $612,000 + $24,480 = $636,480

The interest expense for the second 6 months of the year will be:

Carrying value on July 1, 2012 = $636,480 
Market interest rate at time of issuance = 8% 
Effective interest for the second 6 months = $636,480 x (8% ÷ 2) = $25,459.20

Therefore, the amount of bond interest expense recognized on July 1, 2012 is $24,480 + $25,459.20 = $49,939.20, which is closest to choice letter C.

ABC Corporation Issued $600,000, 10%, 5-Year Bonds on January 1