(CMA adapted, Dec 86 #20) On January 1, Year 1, Nicole Company sold its 5-year, $100,000 face value, 8% bonds at $108,530, to yield an effective annual interest rate of 6%.The bonds are dated January 1, Year 1, and interest is payable annually on January 1.Using the effective interest method of premium amortization, the amount of interest expense (rounded to the nearest dollar) reported by Nicole Company in Year 1 is
A)$1,488
B)$6,512
C)$8,000
D)$8,682
E)$9,681

Question

Quizplus · Accepted Answer

The interest expense using the effective interest method is calculated by multiplying the carrying amount of the bonds at the beginning of the period by the effective interest rate. The carrying amount at the beginning is $108,530, and the effective interest rate is 6%. Thus, the interest expense for Year 1 is $108,530 * 6% = $6,511.80, which rounds to $6,512.

(CMA Adapted, Dec 86 #20) on January 1, Year 1