On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.
Interest Expense = (Cash Paid) + (Discount Amortization) = ($500,000 x 10% x 6/12) + ($13,000/16) = $25,812.50

Question

Quizplus · Accepted Answer

The interest expense calculation is incorrect. It should be:

Interest Expense = (Bond Face Value) x (Annual Interest Rate) x (Time Period) + (Discount Amortization)

= ($500,000 x 10% x 6/12) + ($13,000/16)

= $25,750

Therefore, the statement "The amount of interest expense to be recorded on June 30 is $25,000" is incorrect.

On January 1, a Company Issued a $500,000, 10%, 8-Year