Question

On january 1 of year 1, congo express airways issued $3,700,000 of 6% bonds that pay interest semiannually on january 1 and july 1. the bond issue price is $3,360,000 and the market rate of interest for similar bonds is 7%. the bond premium or discount is being amortized at a rate of $11,333 every six months. the amount of interest expense recognized by congo express airways on the bond issue in year 1 would be

Answer 1

The amount of interest expense recognized by Congo Express Airways would be $199,334 after one year of being issued. This is calculated by finding 6% of the $3,700,000 which is $222,000. Then subtracting the amortized amount of $22,666 per annum, which was found by doubling the 6 month rate of $11,333. This gives you a total of $199,334.

Answer 2

The amount of interest expense recognized by Congo Express Airways would be $88,334 after one year of being issued.

What is the interest expense?

Interest expense refers to the cost of borrowing money and includes company interest payments on any bonds, loans, flexible debt, and credit lines.

As per the given information, Interest payable is calculated by multiplying the face value of the bond with the coupon rate, in this case it is paid on a semiannual basis.

The interest expense is equal to (6%/2) of the $3,700,000 which is $111,000.

To get the actual interest expense amount, we have to then subtract the amortized amount of $22,666 per annum, which was found by doubling the 6 month rate of $11,333.

Therefore,This gives you a total interest expense of $88,334

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