On January 1, 2014, the Baker Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2023. Baker records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2014, is
A) $5,000
B) $5,200
C) $5,800
D) $5,400

Question

Quizplus · Accepted Answer

The bond discount is $50,000 - $46,000 = $4,000. The annual straight-line amortization of the bond discount is $4,000 / (2023 - 2014) = $444.44. The total bond interest expense for the year ended December 31, 2014, is the sum of two semiannual interest payments ($50,000 x 10% x 6/12 = $2,500) plus the bond discount amortization ($444.44 x 2 = $888.88), which is $3,388.88. Therefore, the bond interest expense for the year ended December 31, 2014, is $3,388.88 x 2 = $6,777.76, and the answer closest to this amount is choice D, $5,400.

On January 1, 2014, the Baker Corporation Issued 10% Bonds