On July 1, 2020 Garcia Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 96. Interest is paid on Jan 1 and July 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2020 income statement of Garcia Corporation would be

Garcia Corporation

Bond interest expense reported on the December 31 2020 income statement of Garcia Corporation would be:

= $216,000.

Explanation:

a) Data and Calculations:

Face value of bonds issued = $8,000,000

Issue price at 96 = 7,680,000 (96% * $8,000,000)

Discount on bonds = $320,000

Coupon rate of interest = 5% or 2.5% semi-annually

Maturity period = 10 years

Period of bonds = 20 (10 * 2)

Interest payment = Jan 1 and July 1 (semi-annually)

Amortized semi-annual discounts = $16,000 ($320,000/20)

Interest payment = $200,000 ($8,000,000 * 2.5%)

Interest expense = $216,000 ($200,000 + $16,000)

Analysis on December 31, 2020:

Interest expense $216,000

Interest payable $200,000

Amortized discounts $16,000