5-Star Adventures Inc. financed its $1,000,000 expansion by issuing on January 1, 2014, 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, 2015, 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, 2015, 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.”
Using the elements of critical thinking described on the inside front cover, respond.