On July 1, 2016, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2016, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. What is the amount of the semi-annual interest expense?

Question

Quizplus · Accepted Answer

The annual interest payment is $21,000 ($300,000 x 7%). Since interest is paid semi-annually, each payment will be $10,500 ($21,000 ÷ 2).

To calculate the bond premium (the amount paid above the face value of the bond), we subtract the face value from the cash paid:

$303,000 - $300,000 = $3,000 premium.

Since the bonds mature in ten years, there will be 20 semi-annual interest periods (10 years x 2 semi-annual periods).

To amortize the bond premium, we divide the premium by the number of interest periods:

$3,000 premium ÷ 20 interest periods = $150 premium amortized per period.

The semi-annual interest expense will be the sum of the semi-annual interest payment and the amortization of the premium:

$10,500 semi-annual interest payment + $150 premium amortization = $10,650 semi-annual interest expense.

Therefore, the answer is C) $10,350.