Lecture Video Assessment 10-50 [LO 06] On January 1, Year 1 Residence Company is

Question

Lecture Video Assessment 10-50 [LO 06] On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 offering a 4% discount. They had a 20 year term, a stated rate of interest of 7%, and an effective rate of interest of 7.389%. Assuming Residence uses the effective interest rate method, the amount of interest expense recognized on the December 31, Year 1 income statement is (round any necessary computations to the nearest whole dollar) O $3,499 o $3,500. O $3,547 O $3,600.

Explanation / Answer

Answer 10-50.

Face Value = $50,000
Issue Price = 96%*$50,000 = $48,000

Effective Interest Rate = 7.389%

Interest Expense = 7.389% * $48,000
Interest Expense = $3,547

So, interest expense of $3,547 would be recognized on December 31, Year 1.

Answer 10-51.

Face Value = $50,000
Issue Price = 96%*$50,000 = $48,000

Effective Interest Rate = 7.389%

Interest Expense = 7.389% * $48,000
Interest Expense = $3,547

Stated Interest Rate = 7%

Annual Coupon = 7% * $50,000
Annual Coupon = $3,500

Amortization of Discount = Interest Expense - Annual Coupon
Amortization of Discount = $3,547 - $3,500
Amortization of Discount = $47

So, amortization of discount of $3,547 would be recognized on December 31, Year 1.

Answer 10-52.

False, Stated Rate of interest and effective rate of interest are not synonymous terms.
Stated Rate of Interest is coupon rate whereas effective rate of interest is market rate which are two different terms.

Answer 10-49.

Face Value = $50,000
Issue Price = 96%*$50,000 = $48,000

So, Carrying value of bond liability is $48,000

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