Question

On January 1 of Year 1, Congo Express Airways issued $3,600,000 of 6% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,270,000 and the market rate of interest for similar bonds is 7%. The bond premium or discount is being amortized at a rate of $11,000 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

a) $238,000

b) $216,000

c) $252,000

d) $194,000

e) $119,000

Answer 1

The bond issue price is $3,270,000 which is less than its face value of $3,600,000, therefore the bond is issued at discount of $330,000 ($3,600,000 - $3,270,000). This discount of $330,000 will be amortized over the bond life at a rate of $11,000 every six months.

Interest Expense to be paid in cash = Face value*Interest Rate*6/12

= $3,600,000*6%*6/12 = $108,000

Interest Expense to be recognized for first six months = Interest Exp. paid in cash+Discount Amortized

= $108,000+$11,000 = $119,000

Interest Expense to be recognized for seconde six months for year 1 = $108,000+$11,000 = $119,000

Interest Expense recognized in year 1 = $119,000+$119,000 = $238,000

Therefore, the amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be $238,000. Hence the correct option is a) $238,000.