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5 August, 11:32

A company issued 5-year, 7% bonds with a par value of $500,000. The market rate when the bonds were issued was 6.5%. The company received $505,000 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

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  1. 5 August, 12:02
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    The correct answer is $17,000.

    Explanation:

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

    Bonds percent = 7%

    Par value of bonds = $500,000

    Market rate = 6.5%

    Cash received = $505,000

    So, we can calculate the amount of recorded interest for semiannual interest period by using following formula:

    First we calculate the premium on bonds,

    So, Premium on bonds = Cash received - Par value of bonds

    = $505,000 - $500,000

    = $5,000

    So, straight line amortization = Premium on bonds : years

    = $5,000 : 5

    = $1,000

    So, Amount of interest expense for first semiannual is as follows:

    Amount of interest = (Par value of bonds * Bonds percent) : 2 - (straight line amortization : 2)

    = ($500,000 * 7%) : 2 - ($1,000 : 2)

    = $17,500 - $500

    = $17,000.
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