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14 August, 00:10

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109.

Using effective-interest amortization, how much interest expense will be recognized in 2012?

a. $585,000b. $1,170,000c. $1,176,374d. $1,176,249

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  1. 14 August, 02:32
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    Interest Expense for 2017 is $1,176,373

    Explanation:

    Interese Expense to be recognized in 2017 is $1,176,373

    Interest Expense for Jan-Jun = $14,703,108 * 8%/2 = $588,124

    Amortization of Discount = ($14,703,108 * 8%/2) - ($15,000,000 * 7.8%/2)

    = $588,124 - $585,000 = $3,124

    Carry Amount of Bond on June 30 = $14,703,108 + ($14,703,108 * 8%/2) - ($15,000,000 * 7.8%/2)

    = $14,703,108 + $588,124 - $585,000 = $14,706,232

    Interest Expense for Jun-Dec = [$14,703,108 + ($14,703,108 * 8%/2) - ($15,000,000 * 7.8%/2) ] * 8% / 2

    = ($14,703,108 + $588,124 - $585,000) * 8% / 2

    = $14,706,232 * 8% / 2 = $588,249

    Interest Expense for 2017 = $588,124 + $588,249 = $1,176,373
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