On January 2,2012,Dock Master Construction,Inc.issued $500,000,10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.The interest expense on the bonds at June 30,2012 is

Question

Quizplus · Accepted Answer

First, we need to calculate the bond interest expense using the effective interest rate method.

Step 1: Calculate the semi-annual interest payment on the face value of the bond 
= $500,000 x 8% x 6/12 
= $20,000

Step 2: Calculate the effective interest rate 
i = 3% (6% / 2) 
n = 20 (10 years x 2 semi-annual periods)

PVIFA(3%,20) = 16.4241

Effective interest rate = (1 - 1/(1 + i)^n) / i x P 
= (1 - 1/(1 + 3%)^20) / 3% x $500,000 
= 10.5477 x $500,000 
= $5,273,847

Step 3: Calculate the interest expense for the first semi-annual period 
= $5,273,847 x 3% 
= $158,215

Since the bonds were issued on January 2, 2012, there is only one semi-annual period before June 30, 2012. Therefore, the interest expense for the first period is also the interest expense at June 30, 2012.

Answer: B) $17,236.