The amount of bond interest expense recognized by Webster Company in 2019 with respect to these bonds is:
A)$60,000.
B)$63,000.
C)$120,000.
D)$66,000.

Question

Quizplus · Accepted Answer

The bond interest expense recognized by Webster Company each year is calculated by multiplying the carrying value of the bonds at the beginning of the year by the effective interest rate.

Step 1: Calculate the carrying value of the bonds at the beginning of 2019:
Carrying value on Jan 1, 2019 = $2,100,000 + $49,000 - $60,000 = $2,089,000

Step 2: Calculate the effective interest rate (EIR)
The bonds were issued at a discount, which means the market interest rate was higher than the stated (coupon) interest rate. The effective interest rate is the rate that equates the present value of the future cash flows to the amount received at issuance. To calculate the EIR, we need to use a present value table or formula.

Using a financial calculator: 
N = 10 (10 years to maturity)
PV = -$2,049,000 (the amount received at issuance)
FV = $2,100,000 (the face value to be paid at maturity)
PMT = $60,000 (the annual coupon payment)
Solving for i, we get i = 3.26%
Therefore, the effective interest rate is 3.26%

Step 3: Calculate the bond interest expense for 2019:
Bond interest expense = Carrying value at the beginning of the year × EIR
= $2,089,000 × 3.26%
= $68,033.40 (rounded to nearest dollar)
Therefore, the answer is D) $66,000 (closest amount to $68,033.40 when rounded to nearest thousand).

The Amount of Bond Interest Expense Recognized by Webster Company