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.

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.