A corporation issued $580000, 10%, 5-year bonds on January 1, 2020 for $626400, which reflects an effective-interest rate of 7%. Interest is paid annually on January 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on December 31, 2020, is

a.$40600.

b.$43848.

c.$58000.

d.$62640.

The correct answer is option (B).

Explanation:

According to the scenario, the given data are as follows:

For Jan. 1,2020 value = $626,400

Interest rate = 7%

So, we can calculate the amount of bond interest expense by using following formula:

Interest Expense = Carrying Value * Market Interest Rate

By putting the value of following

Interest expense = $626,400 * 7%

= $626,400 * 0.07

= $43,838

Hence, the amount of bond interest expense to be recognized on December 31, 2020, is $43,838.