A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010.

Question

A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,901,036. Using effective-interest amortization, how much interest expense will be recognized in 2010?

       $195,000
       $390,000
       $392,124
       $392,083

A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,901,036. Using effective-interest amortization, how much interest expense will be recognized in 2010?

Explanation / Answer

$392,083 ,

Interest cash expense on $5000000 at 7.8% (annually) =390000

interest on $4901036 at 8% = 392082.88

discount to be amortised for the year 2010 =   392082.88 - 390000

= 2082.88

Total interest expense = 390000 + 2082.88

= 392082.88

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