Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1, 2014. The stated interest rate on these bonds is 9%. If the effective interest rate is 10.33%, interest expense in 2014 is equal to

Question

Quizplus · Accepted Answer

The effective interest rate is greater than the stated interest rate, which means the interest expense will be greater than the interest paid.

First, we need to calculate the total interest expense for the bond over its lifetime:

total interest expense = face value x stated interest rate x time 
total interest expense = $200,000 x 9% x 5 
total interest expense = $90,000

Next, we need to calculate the annual interest expense using the effective interest rate:

interest expense in 2014 = carrying value of the bond x effective interest rate 
carrying value of the bond on Jan 1, 2014 = face value x issue price = $200,000 x 0.95 = $190,000

interest expense in 2014 = $190,000 x 10.33% 
interest expense in 2014 = $19,627

Therefore, the answer is D) $19,627.

Juneau Company Issued 5-Year $200,000 Face Value Bonds at 95