Dell Co. issues bonds dated January 1, 2009, with a par value of $450,000. The bonds' annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $461,795. How much total bond interest expense will be recognized over the life of these bonds?

There are two parts to computing the interest expense. The bonds are $450,000 par value at 9%. If you multiply $450,000 at 9% you'll get the annual interest rate. Remember the bonds are 3 year bonds.

Second, these bonds are sold at a premium of $11,795. This amount will be adjusted over the 3 year life of the bond. Because they were sold at a premium, the amount is credited to interest expense. The way to think of this is that the company received more than the face value of the bond, so the cost of the bond to the company is less.