On July 1, Browning Corporation issues $1,500,000 of 10-year, 7% bonds dated July 1 at 90 when the market rate of interest is 9%. Browning uses the straight-line method of amortization. Interest is paid each June 30 and December 31. The interest expense recognized for the first semiannual interest payment on December 31 is:
A) $7,500.
B) $52,500.
C) $60,000.
D) $150,000.

Question

Quizplus · Accepted Answer

First, we need to calculate the bond premium:
Face value of bonds = $1,500,000
Issue price of bonds = 90% of face value = $1,350,000
Bond premium = Issue price - Face value = $1,350,000 - $1,500,000 = -$150,000 (negative because it is a premium)

Next, we need to calculate the semiannual interest payment:
Face value of bonds = $1,500,000
Coupon rate = 7%
Semiannual interest payment = (Face value x Coupon rate) / 2 = ($1,500,000 x 7%) / 2 = $52,500

Now, we can calculate the interest expense for the first semiannual interest payment on December 31 using the straight-line method of amortization:
Bond premium = -$150,000
Amortization per year = Bond premium / Years to maturity = -$150,000 / 10 years = -$15,000 per year
Amortization per semiannual period = Amortization per year / 2 = -$7,500
Interest expense = Semiannual interest payment - Amortization of bond premium = $52,500 - (-$7,500) = $60,000

Therefore, the answer is C.

On July 1, Browning Corporation Issues $1,500,000 of 10-Year, 7