The Merchant Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (round to the nearest dollar) of

A) $7,032
B) $7,500
C) $8,790
D) $14,065

Question

Jelet Martinez · Accepted Answer

Final Answer : A, Explanation :  Interest expense is calculated using the market interest rate at the time of issuance, which is 12% annually or 6% semiannually on the carrying amount of the bond. The carrying amount initially is $117,205 (the amount the bonds were sold for). Thus, the interest expense for the first six months is 6% of $117,205, which equals $7,032 (rounded to the nearest dollar).

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