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On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.

-What is the amount of interest expense appearing on the income statement for the year ending December 31,Year 3?
A)$17,500
B)$12,500
C)$14,250
D)$15,000

Question

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On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.

-What is the amount of interest expense appearing on the income statement for the year ending December 31,Year 3?
A)$17,500
B)$12,500
C)$14,250
D)$15,000

Quizplus · Accepted Answer

Issue price = Face value of $250,000 × 95% = $237,500
Discount = Face value of $250,000 - Proceeds of $237,500 = $12,500
Annual amortization = Discount of $12,500 ÷ 5 years = $2,500
Cash interest payment = Face value of $250,000 × Stated rate of 6% = $15,000
Year 3 Interest expense = Cash payment of $15,000 + Amortization of discount of $2,500 = $17,500

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