Rodgers corporation produces and sells football equipment. On July 1, 20y1, Rodgers issued $77,900,000 of 10-year, 11% bonds at a market (effective) interest rate of 10%, receiving cash of $82,754,070. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. What is the amount of interest expense that Rodgers corporation will recognize on its income statement for the fiscal year ending December 31, 20y1?
1) $4,289,500
2) $4,289,000
3) $4,289,050
4) $4,289,550
To calculate the amount of interest expense for the fiscal year ending December 31, 20y1, we need to determine the total interest payments for the year.
The bonds were issued on July 1, 20y1, so for the fiscal year ending December 31, 20y1, there will be one interest payment made on December 31, 20y1.
The face value of the bonds is $77,900,000 and the market interest rate is 10%. Therefore, the annual interest expense can be calculated as:
Interest Expense = Face Value of Bonds * Market Interest Rate
= $77,900,000 * 10%
= $7,790,000
Since interest is paid semiannually, the interest expense for the fiscal year will be half of the annual interest expense, as only one interest payment is made:
Interest Expense (for fiscal year) = Annual Interest Expense / 2
= $7,790,000 / 2
= $3,895,000
Therefore, the amount of interest expense that Rodgers Corporation will recognize on its income statement for the fiscal year ending December 31, 20y1 is $3,895,000.
None of the options provided match this calculation, so none of the given options are correct.