The Merchant Company issued 10-year bonds on January 1, 2011. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2011, Merchant should record interest expense (round to the nearest dollar) of
A) $7,032
B) $7,500
C) $8,790
D) $14,065

Question

Quizplus · Accepted Answer

The first interest payment for the year was made on January 1, 2011, so the interest expense recorded on July 1, 2011, will only cover the period between January 1 and July 1, 2011.
The annual interest payment is $15,000 ($100,000 x 15%), which means the semi-annual payment is $7,500 ($15,000 / 2). 
The effective interest rate is 12%, so the interest expense can be calculated as follows:
$117,205 x 0.06 = $7,032 (interest for 6 months)
Therefore, the answer is A) $7,032.

The Merchant Company Issued 10-Year Bonds on January 1, 2011