On January 1 2015 EZ Auto Sales issued 15000 in bonds for 1

) On January 1, 2015, EZ Auto Sales issued $15,000 in bonds for $15,800. They were 10-year bonds with a stated rate of 9%, and pay interest on a semiannual basis. EZ Auto Sales uses the straight-line method to amortize the bond premium. On June 30, 2015, when EZ makes the first payment to bondholders, how much will they report as Interest Expense? A) $635 B) $675 C) $275 D) $280

Solution

Interest expense = Cash interest paid – Bond premium amortized

= ($15,000 × 4.5%) – ($800 / 20)

=$675 - $40

= $635

On June 30, 2015, EZ will report $635 as interest expense.

A is the correct answer.