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How much interest expense will Hanover report on its income statement on December 31, Year 1?

How much interest expense will Hanover report on its income statement on December 31, Year 1?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Question:** On January 1, Year 1, Hanover Corporation issued bonds with a $39,000 face value, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1? **Multiple Choice:** - ○ $234 - ○ $1,170 - ○ $3,354 - ○ $3,120 --- **Explanation:** The question involves calculating the interest expense for bonds issued at a discount and involves understanding bond amortization using the straight-line method. The face value of the bond is $39,000, and the bonds were issued at 97% of face value, meaning they were issued for $37,830 ($39,000 x 0.97). The discount on the bond issuance is the difference between the face value and the issued value, which is $1,170 ($39,000 - $37,830). Using the straight-line method, this discount is amortized equally over the 5-year life of the bond. Therefore, the annual amortization amount is $234 ($1,170 ÷ 5 years). The annual interest based on the face value is $3,120, calculated as $39,000 x 8%. To determine the total interest expense for Year 1, add the annual interest and the annual discount amortization: Interest Expense = Annual Interest + Annual Discount Amortization = $3,120 + $234 = $3,354.
Transcribed Image Text:**Question:** On January 1, Year 1, Hanover Corporation issued bonds with a $39,000 face value, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1? **Multiple Choice:** - ○ $234 - ○ $1,170 - ○ $3,354 - ○ $3,120 --- **Explanation:** The question involves calculating the interest expense for bonds issued at a discount and involves understanding bond amortization using the straight-line method. The face value of the bond is $39,000, and the bonds were issued at 97% of face value, meaning they were issued for $37,830 ($39,000 x 0.97). The discount on the bond issuance is the difference between the face value and the issued value, which is $1,170 ($39,000 - $37,830). Using the straight-line method, this discount is amortized equally over the 5-year life of the bond. Therefore, the annual amortization amount is $234 ($1,170 ÷ 5 years). The annual interest based on the face value is $3,120, calculated as $39,000 x 8%. To determine the total interest expense for Year 1, add the annual interest and the annual discount amortization: Interest Expense = Annual Interest + Annual Discount Amortization = $3,120 + $234 = $3,354.
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