Question

On June 30, 2018, L. N. Bean issued $10 million of its 8% bonds for $9 million. The bonds were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, how much bond interest expense should the company report for the 6 months ended December 31, 2018?

Answer 1

Answer:

interest expense 450,000

Explanation:

The interest expense will be the carrrying value times the market rate

face value 10,000,000

issued at    9,000,000

discount    1,000,000

face - discount = carrying value = 10 - 1 = 9 millions

9,000,000 x 10%/2 = 450,000 interest expense

then face value x bond rate = cash proceeds

10,000,000 x 8%/2 = 400,000 cash proceeds

the diference wil lbe the amortization

amortization 450,000 - 400,000 = 50,000

interest expense 450,000

               cash                       400,000

               discount on BP        50,000

next period the carrying value will be

10,000,000  -  950,000 = 9,050,000