Herman Company received proceed of $188,500 on 10-year ,8% bonds issued on
January 1 ,2010.The bonds had a face value of $200,000,pay interest semi-annually
on June 30 and December 31,and have a call price of 101, Herman uses the Straight-line method of amortization.What is the amount of interest expense Herman will
show with relation to these bonds for year ended December 31,2012?
- JamesLv 58 年前最佳解答
Since the proceeds Herman received for the bonds were less than the bonds’ face value, we know the bonds were sold at a discount. The bonds’ discount needs to be amortized over the life of the bonds, and each year’s amortized amount needs to be treated as additional interest expense.
The bonds’ discount amount is $11,500, which is the difference between the face amount ($200,000) and the proceeds amount ($188,500.) When the discount is amortized on a straight-line basis, each year’s amortized amount is $1,150 (or one tenth of $11,500.)
Since the coupon rate is 8%, Herman needs to make two interest payments totaling $16,000 (or $200,000 times 8%) in each year of the bonds’ life.
Adding the amortized discount amount of $1,150 and the coupon interest payments of $16,000 for any given year gives us the annual interest expense of $17,150.
The answer is C.