On January 1, a company issued 2%, 20year

On January 1, a company issued 2%, 20year

bonds with a face amount of $85 million for $52,993,913 to

yield 5%. Interest is paid semiannually.

What was the interest expense at the effective interest rate on the December 31 annual income

statement? (Enter your answer in dollars not in millions. Round "PV Factor" to 5 decimal places

and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Interest expense $ 2,661,567 ± .01%

Explanation:

Interest will be the effective rate times the outstanding balance:

Date General Journal Debit Credit

June 30 Interest expense (2.5% × $52,993,913) 1,324,848

Discount on bonds payable (difference) 474,848

Cash (1.0% × $85,000,000) 850,000

Date General Journal Debit Credit

Dec. 31 Interest expense (2.5% × [$52,993,913 + 474,848]) 1,336,719

Discount on bonds payable (difference) 486,719

Cash (1.0% × $85,000,000) 850,000

Interest expense for the year: $1,324,848 + 1,336,719 = $2,661,567