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Austin Corporation issues $6,000,000 of 10%,10-year bonds,dated December 31,Year 1.The bonds are issued on April 30,Year 2,at 100 plus accrued interest.Interest on the bonds is payable semiannually each June 30 and December 31.
-The amount of Austin's interest expense on this bond issue during Year 2 amounts to:
A)$400,000.
B)$450,000.
C)$360,000.
D)$600,000.

Question

Quizplus · Accepted Answer

The bonds have a face value of $6,000,000 with a 10% annual interest rate, resulting in $600,000 annual interest. Since interest is paid semiannually, each payment is $300,000. The bonds were issued on April 30, so interest expense for Year 2 includes the June 30 and December 31 payments, totaling $600,000. However, since the bonds were issued at 100 plus accrued interest, the interest expense for the period from April 30 to June 30 is not included in the expense calculation for Year 2, resulting in $400,000 ($600,000 - $200,000 accrued interest).

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