On January 1,Year 1,Denver Co.issued bonds with a face value of $100,000,a stated rate of interest of 8%,and a 5-year term to maturity.The bonds were sold at 102.5.Denver uses the straight-line method to amortize bond discounts and premiums.What is the amount of interest expense during Year 1?
A)$7,500
B)$8,500
C)$8,000
D)$8,200

Question

Quizplus · Accepted Answer

Proceeds from issuance = Face value of $100,000 × 102.5% = $102,500
Premium = Proceeds of $102,500 - Face value of $100,000 = $2,500
Annual amortization of premium = Premium of $2,500 ÷ 5 years = $500
Annual interest payment = $100,000 × Stated rate of 8% = $8,000
Annual interest expense = Cash payment of $8,000 -Amortization of premium of $500 = $7,500