Mace Corporation sold (issued)30 of its $1,000 bonds payable,5% annual interest,due in ten years.The bonds were sold at 98.Assume straight-line amortization.What would the interest expense be each full year?

Question

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The company sold 30 bonds, each with a face value of $1,000 and a coupon rate of 5%, which means that the annual interest paid is 5% x $1,000 = $50 per bond. The bonds were sold at 98, which means that the company received 98% x $1,000 = $980 per bond.

The total amount of money the company received from the bond issuance is $980 x 30 = $29,400.

To calculate the interest expense each year, we need to first calculate the total interest expense over the life of the bond. The total interest expense is:

$50 x 30 = $1,500

Since the bonds are being amortized using straight-line amortization, we can divide the total interest expense by the number of years the bonds are outstanding (10 years) to get the annual interest expense:

$1,500 ÷ 10 = $150

However, since the bonds were sold at a discount, we need to also account for the amortization of the discount over the life of the bond. The amount of discount is:

($1,000 - $980) x 30 = $600

Again, using straight-line amortization, we can divide the total discount by the number of years the bonds are outstanding (10 years) to get the annual amortization of the discount:

$600 ÷ 10 = $60

Therefore, the total interest expense each full year is:

$150 + $60 = $210

However, since the question asks for the interest expense each full year, and the bonds were issued for the full year, we can simply say that the interest expense each year is $210.

The closest answer choice is D) $1,560, which is the total interest expense ($1,500) plus the first year's amortization of the discount ($60).

Mace Corporation Sold (Issued)30 of Its $1,000 Bonds Payable,5% Annual