Question

On January 1, Year 1, Dixon Company issued bonds with a $50,000 face value at 96. The bonds had a 10 year term and an 8% stated rate of interest. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, which of the following statements regarding the recognition of interest expense on December 31, Year 1 is true? (Select all that apply.) Read about this The correct answer is shown. Interest expense shown on the income statement is $3,800. ✓ Interest expense shown on the income statement is $4,200. Interest expense is the amount of cash paid for interest ($50,000 x 8% = $4,000) plus the portion of the discount that is amortized ($2,000 = 10 years = $200 per year). In summary, $4,000 cash payment plus $200 discount amortization = $4,200 interest expense. The carrying value of the bond liability increases by $200. The amortization of the bond discount decreases the balance in the Discount on Bonds Payable account, thereby increasing the carrying value of the liability. The Discount on Bonds Payable account increases by $200. Challenge OK

Can someone explain where the $2000/10 Years comes from?

Answer 1

Ans. Face value per bond is $100. So the no. of bonds are $50,000/100 = 500 bonds

These were issued at $96. So there is a discount of $4.

The discount price = $4*500 bonds = $2000

Term of bonds (as given) = 10 years.

So the amortized discount would be = $2000/10 = $200 per year...