On January 1 a company issued 6 10year bonds with a face amo

On January 1, a company issued 6%, 10-year bonds with a face amount of $70 million for $60,486,993 to yield 8%. Interest is paid semiannually. What was the straight-line interest expense on the December 31 annual income statement?

Solution

Straight-line interest expense on the December 31 = $2,575,650

Workings

Discount on Issue of Bond = Face Value – Issue Price

= $70,000,000 - 60,486,993

= $9,513,007

Annual Amortization of Discount on issue under straight line method

= $9,513,007 / 20 Years

= $475,650

Annual Coupon Interest Amount = Face Value x Coupon rate

= $70,000,000 x 6% x ½

= $2,100,000

Therefore, Interest Expense on the December 31

= Coupon Interest Amount + Annual Amortization of Discount on issue

= $2,100,000 + $475,650

= $2,575,650