On January 1, 2014, Snow, Inc. issued $50,000 of ten-year 6% bonds for $43,800. Interest was payable semiannually. The effective yield was 8%. The effective interest method of discount amortization was used. What amount of interest expense should be recorded for the six-month period ending December 31, 2014?

Question

Quizplus · Accepted Answer

Using the effective interest method of discount amortization, the bond discount of $6,200 ($50,000 - $43,800) is amortized over the life of the bond. The semiannual interest payment is calculated as $50,000 x 6% x 6/12 = $1,500.

For the first six months of 2014, the interest expense is calculated as follows:

Beginning balance of discount: $6,200 
Discount amortization for 6 months: $6,200 x 8%/2 = $248 
Interest expense: $1,500 + $248 = $1,748

Therefore, the answer is D) $1,762 (rounded to the nearest dollar).