A company issued 6-year, 10 percent bonds on September 1, 2000, for $91,619. The bonds have a maturity value of $100,000 and pay interest semiannually on March 1 and September 1. The market rate of interest at the date of issue was 12 percent. The company has an accounting year-end of December 31. The amount of interest expense on March 1, 2001, is: A. $1,527 B. $1,832 C. $1,839 D. $2,000
correct answer is B. The interest expense for the six months from September 1, 2000, to March 1, 2001, would be $5,497 ($91,619 x .06). On December 31, 2000, four months would be recognized in the amount of $3,665 ($5,497 x 4/6). The rest of the interest, two months, would be recognized on March 1, 2001. This amount would be $1,832 ($5,497 - $3,665). I got this one wrong too…
Shoot…I used the coupon rate instead of the market rate. O well…
Dumb question… long day, bear with me… The difference between what is being paid semi annually on the note $6K = (100K*12%)/2 and the amount recorded under interest expense 5497 = (91619*6%)… goes where?
Chadtap - Good question… I’m not sure, but I would think it is an amortization expense of the discount. Can anyone confirm?
That is the bond amortization of the discount, which will increase the liability balance in the case above 91619 towards par in the case of a Premium bond, that would be amortization of the premium, a -ve balance, and would go towards reducing the liability balance towards par.