herman company received proceeds of $188,500 on 10-year, 8% bonds issued on january 1, 2009. the bonds had a face value of $200,000, pay interest semi-annually on june 30 and december 31, and have a call price of 101. herman uses the straight-line method of amortization. what is the amount of interest expense herman will show with relation to these bonds for the year ended december 31, 2010?
16,000$
To calculate the interest expense for the year ended December 31, 2010, we need to determine the amount of interest paid semi-annually and the amortization of the bond premium.
1. Calculate the semi-annual interest payment:
The annual interest payment can be calculated by multiplying the face value of the bonds ($200,000) by the stated interest rate (8%):
Annual interest payment = $200,000 * 0.08 = $16,000
Since interest is paid semi-annually, the semi-annual interest payment is:
Semi-annual interest payment = $16,000 / 2 = $8,000
2. Calculate the bond premium:
The premium is the excess of the bond issue price ($188,500) over the face value ($200,000):
Bond premium = $200,000 - $188,500 = $11,500
3. Determine the amortization of the bond premium:
Since the company uses the straight-line method of amortization, the annual amortization is calculated by dividing the bond premium by the number of years:
Annual amortization = $11,500 / 10 = $1,150
The interest expense for the year ended December 31, 2010, includes the semi-annual interest payment ($8,000) and the annual amortization of bond premium ($1,150):
Interest expense for the year = (Semi-annual interest payment * 2) + Annual amortization
Interest expense for the year = ($8,000 * 2) + $1,150
Interest expense for the year = $16,000 + $1,150
Interest expense for the year = $17,150
Therefore, Herman Company will show $17,150 as the amount of interest expense with relation to these bonds for the year ended December 31, 2010.
To determine the amount of interest expense related to these bonds for the year ended December 31, 2010, we need to consider the following information:
1. Face value of the bonds: $200,000
2. Coupon rate: 8% (annual interest rate)
3. Interest payment frequency: Semi-annually (June 30 and December 31)
4. Proceeds received: $188,500
5. Call price: 101 (which means the company can redeem the bonds at 101% of the face value)
First, let's calculate the annual interest payment:
Annual Interest Payment = Face Value * Coupon Rate
Annual Interest Payment = $200,000 * 8% = $16,000
Since the interest payments are made semi-annually, we divide the annual interest payment by 2 to get the semi-annual interest payment:
Semi-annual Interest Payment = Annual Interest Payment / 2
Semi-annual Interest Payment = $16,000 / 2 = $8,000
Next, let's determine how many interest payments were made in the year 2010. Since the interest payments are made on June 30 and December 31, there are two interest payments in a year.
Now, we can calculate the total interest expense for the year 2010:
Total Interest Expense = Semi-annual Interest Payment * Number of Interest Payments
Total Interest Expense = $8,000 * 2 = $16,000
Therefore, the amount of interest expense that Herman will show on its financial records for the year ended December 31, 2010, is $16,000.