On January 1, 2014, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $192,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2018. Horton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2014, is
A) $10,800
B) $18,400
C) $21,600
D) $28,000

Question

Quizplus · Accepted Answer

The bond discount is the difference between the face value of the bonds and the amount they were sold for, which is $8,000 in this case ($200,000 - $192,000). Since the bonds mature in five years and there are ten semiannual periods, the straight-line amortization of the bond discount is $1,600 per semiannual period ($8,000/10).

Therefore, the bond interest expense for the year ended December 31, 2014, would be the sum of the semiannual interest payments (calculated using the face value of the bonds) and the amortization of the bond discount for the first semiannual period ($1,600):

($200,000 x 10% x 6/12) + $1,600 = $10,000 + $1,600 = $11,600

Since this amount is for one semiannual period, the total bond interest expense for the year would be twice this amount:

$11,600 x 2 = $23,200

Therefore, answer C is the best choice.

On January 1, 2014, the Horton Corporation Issued 10% Bonds