Question

ABC Company received $9,631 for its 5-year, 10% bonds with a total face value of $10,000. The market rate of interest was 11%. The bonds pay interest annually on December 31. Approximately how much interest expense will ABC Corporation record on the first annual interest payment date using the effective-interest method?


A.

$1,059

B.

$1,000

C.

$1,074

D.

$963.10

Answer 1

Answer:

A.  $1,059

Explanation:

The effective-interest method comes into play when bonds are purchased at a discount or premium.

This bond has the face value of $10,000, and has been purchased at $9,631 called the carrying amount at beginning/ first year in bond life.

The bond’s interest income is calculated as the carrying amount multiplied by the market rate of interest. In this case, the first annual interest income for bond holder is $1,059.41 = $9,631 x 11%

Then ABC Corporation record $1,059.41 for its interest expense on the first annual interest payment date using the effective-interest method