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Carrying amount and interest expense of bonds

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2006. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

Payment Cash Effective Decrease in Outstanding
Interest Balance Balance
0 11,487,747
1 400,000 344,632 55,368 11,432,379
2 400,000 342,971 57,029 11,375,350
3 400,000 341,261 58,739 11,316,611
4 400,000

What is the total interest expense recorded on the bonds in the year 2007?
A) $800,000.
B) $680,759.
C) $342,961.
D) $119,241.

Rationale:
Semiannual effective rate = $344,632/$11,487,747 = 3%
Interest expense = $341,261 + ($11,316,611 x 3%) = $680,759

What is the carrying value of the bonds as of December 31, 2007?
A) $11,432,379.
B) $11,375,350.
C) $11,316,611.
D) $11,256,109.

Rationale:
Semiannual effective rate = $344,632/$11,487,747 = 3%
Amortization Payment 4 = $400,000 - ($11,316,611 x 3%) = $60,502
Carrying value = $11,316,611 - $60,502 $11,256,109

What would be the total interest expense recognized for the bond issue over their full term?
A) $6,512,253.
B) $8,000,000.
C) $11,256,109.
D) $11,487,747.

Rationale: ($400,000 x 2 x 10) - ($11,487,747 - $10,000,000) = $6,512,253

Solution Summary

Answers questions on carrying amount and interest expense of bonds.

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