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On January 1, Year 1, Weller Company issued bonds with a $360,000 face value, a stated rate of interest of 10.50%, 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 8.50%. Interest is paid annually on December 31. Assuming Weller issued the bond for $390,440, what is the amount of interest expense that will be recognized during Year 3? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

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Answer:

$ 32,370  

Explanation:

First and foremost,find attached amortization schedule showing the opening balance of the bonds in each year,the interest expense which is the opening balance multiplied by market interest rate of 8.5% as well as the interest coupon which is face value of $360,000 multiplied by stated interest of 10.50% i.e $360,000*10.5%=$37,800

The interest expense in year 3 = opening balance in year 3*8.5%=$380,823*8.5% =$32,370  

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Tundexi

The amount of interest expense that will be recognized during Year 3 is $32,370.

For year 1

Cash paid = $360,000*10.5%

Cash paid = $37,800

Interest expense = $390,440*8.5%

Interest expense = $33,187

Premium amortization = $37,800 - $33,187

Premium amortization = $4,613

For year 2

Cash paid = $37,800

Interest expense = $385,827*8.5%

Interest expense = $32,795

Premium amortization = $37,800 - $37,800

Premium amortization = $5,005

For year 3

Cash paid = $37,800

Interest expense = $380,822 * 8.5%

Interest expense = $32,370

Therefore, The amount of interest expense that will be recognized during Year 3 is $32,370.

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