A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

$3,289.5

Explanation:

The computation of the amount of recorded interest expense for the first semiannual interest period is shown below:-

Amortization of premium = Premium amount ÷ Number of semi-annual periods

where

Premium amount = Par value - issue price

= $102,105 - $100,000

= $2,105

Number of semi-annual periods = 5 × 2

= 10 periods

Amortization of premium = $2,105 ÷ 10

= 210.5

Semi-annual interest expense = Face value × Coupon rate × (6 ÷ 12)

= $100,000 × 7% × (6 ÷ 12)

= $3,500

First semi-annual interest expense = $3,500 - 210.5

= $3,289.5

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