14. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. Th

ID: 2343092 • Letter: 1

Question

14. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten year tem and pay interest semiannually. This is the partial bond amortization schedule for the bonds. PaymentCashEffective Decrease in Outstanding InterestBal ance Balance 400,000344,632 400,000342.971 400000341.261 400,000 11.487,747 55,368 11432 379 57,029 11.375,350 8.73911316.611 What would be the total interest expense recognized for the bond issue over its full term? A. S6,512,253 B. $11,487,747 C. S11,256,109 D. $8,000,000

Explanation / Answer

Correct Answer (A) $6,512,253

Calculation of Effective Interest

(A)

Par value of bond ($1000x 10000)

$ 10,000,000.00

(B)

Cash received on bond issue

$ 11,487,747.00

C=A-B

Premium on bond Received

$ 1,487,747.00

Interest paid in 10 years ($400000 for 20 terms)

$ 8,000,000.00

E=D-C

Effective interest expense

$ 6,512,253.00

Premium on bond is adjusted with interest expense every time interest is paid. The effective interest amount will be total interest minus premium on bond.