On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,087 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

A) $132,500.
B) $225,000.
C) $265,174.
D) $245,000.
E) $224,826.

Question

Emily Stanfield · Accepted Answer

Final Answer : C, Explanation :  Step 1: Calculate the annual interest paymentAnnual interest payment = Face value of bond x Annual interest rate= $3,500,000 x 7%= $245,000Step 2: Calculate the bond discount or premium amortization per six monthsBond discount or premium amortization per six months = Bond discount or premium / Number of six-month periods= ($3,500,000 - $3,197,389) / 20= $15,306.55Step 3: Calculate interest expense recognized in the first six monthsInterest expense recognized in the first six months = (Carrying value of bond on January 1) x (Market interest rate per period)= ($3,197,389 + $15,306.55) x 8% / 2= $131,558.64Step 4: Calculate interest expense recognized in the second six monthsInterest expense recognized in the second six months = (Carrying value of bond on July 1) x (Market interest rate per period)= ($3,197,389 + $15,306.55 x 2) x 8% / 2= $133,615.03Step 5: Calculate the total interest expense recognized in Year 1Total interest expense recognized in Year 1 = Interest expense recognized in the first six months + Interest expense recognized in the second six months= $131,558.64 + $133,615.03= $265,173.67Therefore, the answer is C) $265,174.

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