5-Star Adventures Inc. financed its $1,000,000 expansion by issuing on January 1, 2020, a 5%, 10-year bond dated the same day with annual interest payments to be made each December 31. The market interest rate at the time of issue was 7%. Assume that you are the chief financial officer of 5-Star Adventures. At the December 31, 2021, board meeting, a draft set of financial statements was presented for the board’s review and a major shareholder immediately said: “The $1,000,000 bond payable is reported on the December 31, 2021, draft balance sheet as $869,695 and the income statement reports bond interest expense of $50,000. In Note 7 to the financial statements it indicates that total interest expense to be recognized over the 10-year term on this bond is $500,000. This doesn’t make sense to me.”

Required

Using the elements of critical thinking described on the inside front cover, respond. Consider the following subheadings to organize your response, and include an amortization table to show the total interest expense.

• Problem

• Goal

• Principles

• Facts

• Conclusions