Interest expense on this bond issue reported in Cricket's Year 1,income statement is:
A)$2,400,000.
B)$4,800,000.
C)$5,400,000.
D)$7,200,000.

Question

Quizplus · Accepted Answer

The bond issue was sold at a discount of $600 million ($1200 - $600) and has a coupon rate of 8%, so the effective interest rate is 10%.
The total face value of the bond issue is $6 billion ($1200 million x 5), so the annual interest expense is $600 million ($6 billion x 10%). Therefore, the interest expense for Year 1 is also $600 million. However, since the bonds were issued on July 1, only half a year's interest is recorded in Year 1, which is $300 million.
Therefore, the correct answer is C) $5,400,000 ($300 million x 18).

Interest Expense on This Bond Issue Reported in Cricket's Year