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18 March, 17:46

Issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will be recognized in 2018?

A. $780,000

B. $784,249

C. $784,166

D. $390,000

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  1. 18 March, 20:17
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    B. $784,249

    Explanation:

    The effective interest amortization is an accounting practice used for discounting a bond. This method isused for bonds sold at a discount; the amount of the bond discount is amortised as interest expense over the bond's life

    Interest expenses for 6 months from Jan 1st to Jun 30th is $392,083 = $9,802,072 * 8%/2

    Amortization of Discount is $2,083 = $9,802,072 * 8%/2 - 10,000,000*7.8%,/2

    Carry Amount of Bond on June 30 $9,804,155 = bond proceed of $9,802,072 + Amortization of Discount is $2,083

    Interest expenses for 6 months from Jul 1st to Dec 31st is $392,166 = Carry amount of Bond $9,804,155 x effective rate 8%/2

    Total interest expense will be recognized in 2018 is $784,249 = $392,083 + $392,166
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