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on january 1, year 1, weller company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. weller uses the effective interest method to amortize bond discounts and premiums. the market rate of interest on the date of issuance was 8%. interest is paid annually on december 31. assuming weller issued the bond for $431,940, what is the amount of interest expense that will be recognized during year 3? a. $33,649 b. $20,000 c. $34,120 d. $46,350

Sagot :

The amount of interest expense that will be recognized during Year 3 is $34,058.

For year 1,

Cash paid = $400,000 x 10%

Cash paid = $40,000

Interest expense = $431,940 x 8%

Interest expense = $34,555

Premium amortization = $40,000 - $34,555

Premium amortization = $5,445

For year 2,

Cash paid = $40,000

Interest expense = $426,495 x 8%

Interest expense = $34,120

Premium amortization = $40,000 - $34,120

Premium amortization = $5,880

For year 3,

Cash paid = $40,000

Interest expense = $426,060 x 8%

Interest expense = $34,085

Therefore, The amount of interest expense that will be recognized during Year 3 is $34,085.

The expense of interest is related to the price of borrowing money. It is the fee that a lender assesses to a borrower in exchange for using their funds. Interest expense can be the cost of borrowing money from banks, bondholders, and other sources on the income statement. the amount of loan interest paid, and It is listed as a non-current liability on the liabilities section of the company's balance sheet. The simplest way to distinguish between interest and profit is to understand that they are two distinct concepts: profit is simply income fewer costs and expenses, regardless of whether the entity is a bank or another business. Interest is a type of income common to banks.

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