On January 1, 2020, the Baker Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $54,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2029. Baker records straight-line amortization of the bond premium. The bond interest expense for the year ended December 31, 2020, is
$2,500
$2,700
$4,600
$5,000
To calculate the bond interest expense for the year ended December 31, 2020, we need to determine the annual interest payment and the amortization of the bond premium.
1. Annual interest payment:
The bonds have a face value of $50,000 and a coupon rate of 10%. This means that the annual interest payment is $50,000 x 10% = $5,000.
2. Amortization of bond premium:
The bonds were sold for $54,000, which is a premium of $54,000 - $50,000 = $4,000.
Since the bonds mature on December 31, 2029, the total number of interest payment periods is 20 (10 years x 2 semiannual payments).
The annual amortization of the bond premium is $4,000 / 20 = $200.
3. Bond interest expense for the year ended December 31, 2020:
Since the bonds pay interest semiannually, there are two interest payment periods in 2020.
The bond interest expense for each semiannual period is $5,000 / 2 = $2,500.
Therefore, the bond interest expense for the year ended December 31, 2020, is $2,500 + $2,500 = $5,000.
Therefore, the correct answer is $5,000.
To calculate the bond interest expense for the year ended December 31, 2020, we need to determine the amortization of the bond premium.
Step 1: Calculate the bond premium
The bond premium is the difference between the face value of the bonds and the amount they were sold for.
Bond premium = Selling price - Face value
Bond premium = $54,000 - $50,000
Bond premium = $4,000
Step 2: Determine the annual amortization
Since the bonds pay interest semiannually, there are two interest payments in a year. We need to find the amortization for one interest payment, and then multiply it by two.
Amortization per interest payment = Bond premium / (Number of interest payments until maturity)
Amortization per interest payment = $4,000 / 20 (10 years * 2 interest payments per year)
Amortization per interest payment = $200
Step 3: Multiply the amortization per interest payment by the number of interest payments in a year (2 interest payments per year).
Bond interest expense for the year = Amortization per interest payment * Number of interest payments in a year
Bond interest expense for the year = $200 * 2
Bond interest expense for the year = $400
Therefore, the correct answer is $400.