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On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.

-What is the amount of interest expense shown on Jones' income statement for the year ending December 31,Year 1?
A)$16,200
B)$21,000
C)$15,000
D)$13,800

Question

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On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.

-What is the amount of interest expense shown on Jones' income statement for the year ending December 31,Year 1?
A)$16,200
B)$21,000
C)$15,000
D)$13,800

Quizplus · Accepted Answer

Issue price = Face value of $200,000 × 97% = $194,000
Discount = Face value of $200,000 - Issue price of $194,000 = $6,000
Annual amortization of discount = $6,000 ÷ 5 years = $1,200
Cash interest payment = Face value of $200,000 × .075 = $15,000
Interest expense = Cash payment of $15,000 + Amortization of discount of $1,200 = $16,200

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