On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745

Question

On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

Refer to Kaleidoscope Paint. The interest expense on the bonds at June 30, 2013, is:

On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

Explanation / Answer

Since market interest rate is higher than the bond interest rate, the bond was issued at a discount.

Total bond discount = $(500,000 - 480,745) = $19,255

Semi-annual amortization of bond premium = $19,255 / 20 = $962.75

Semi-annual coupon payment = $500,000 x 9% x (6/12) = $22,500

So,

Recorded interest expense = $(22,500 - 962.75) = $21,537.25

Option (d) is closest to the answer.

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