On January 1, 2010, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $196,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2014. Horton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2010, is
A) $19,800
B) $19,200
C) $20,800
D) $24,000

Question

Quizplus · Accepted Answer

The bond discount is $4,000 ($200,000 - $196,000) and is amortized over 5 years (10 periods). The annual amortization is $400 ($4,000 / 10 periods * 2 periods per year). The cash interest paid is $20,000 (10% of $200,000). Therefore, the bond interest expense for 2010 is $20,000 + $400 = $20,800.

On January 1, 2010, the Horton Corporation Issued 10% Bonds