Cramer Company sold 5-year, 8% bonds on October 1, 2009. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2009, income statement (assume straight-line amortization)?

Question

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The bond premium of $2,000 ($102,000 - $100,000) is amortized over 5 years, or $400 per year. For 3 months (October to December), the amortization is $100. The interest expense is the cash interest ($2,000 for 3 months) minus the amortization ($100), totaling $1,900.

Cramer Company Sold 5-Year, 8% Bonds on October 1, 2009