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23 August, 16:16

A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:a. $3,326. b. $3,500.00. c. $3,673.70. d. $7,000.00. e. $7,347.40.

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  1. 23 August, 19:38
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    The correct answer is c) $3,673.70

    Explanation:

    First, we need to find the discount amount

    Formula:

    Par Value - Market Price = Discount amount

    $100,000 Par value - $96,526 market price

    = $3,474 Discount Amount

    We need to find the Semi-Annual Discount Amount

    Formula:

    The Discount Amount : (n x 2)

    "n = number of years"

    =$3,474 Discount Amount : (10 x 2)

    = $3,474 : (20)

    = $173.7 Semi-Annual Discount Amount

    For the next step, we need to find the Semi-Annual Coupon Interest Amount

    Formula:

    Par Value * Coupon Rate : 2

    = ($100,000 x 0.07) : 2

    = $7,000 : 2

    = $3,500 Semi-Annual Coupon Interest Amount

    Finally, we find the Interest Expense for first semi-annual Interest amount

    Formula:

    Semi-Annual Coupon Interest Amount + Semi-Annual Discount Amount

    = $173.70 + $3,500

    = $3,673.7

    The interest expense for the first Semi annual interest amount is $3,673.7.
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