Question

Basil company issued $640,000, 6%, 5-year bonds for 104, with interest paid annually. assuming straight-line amortization, what is the amount of interest expense for the first year of the bond? answer

a. $38,400
b. $25,600
c. $33,280
d. $5,120

Answer 1

The amount of interest expense for the first year of the bond can be calculated using the straight-line amortization method. The interest expense is $38,400. Therefore, the correct option is A.

Step-by-step explanation:

The amount of interest expense for the first year of the bond can be calculated using the straight-line amortization method. The interest expense is determined by multiplying the bond's carrying value (the initial issue price minus any amortization) by the bond's stated interest rate.

In this case, the bond was issued for $640,000 at a 6% interest rate. The straight-line amortization method assumes equal amounts of amortization over the life of the bond. Therefore, the amortization for each year is calculated by dividing the difference between the face value and the carrying value by the number of years. Since this is a 5-year bond, the annual amortization is $640,000 - $640,000/5 = $5120.

In the first year, the carrying value of the bond is equal to the initial issue price, so the interest expense is $640,000 * 6% = $38,400.