Question

Clio Co. issued 5-year $500,000 debenture bonds on January 2. The bonds pay interest semiannually. Clio uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $337,806. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,512 and crediting cash for $15,000. What is the annual stated interest rate for the debenture bonds?a. 4%b. 3%c. 8%d. 6%

Answer 1

Answer:

d. 6%

Explanation:

The computation of the annual stated interest rate for the debenture bonds is shown below:

= Annual interest payment ÷ Issued amount of debenture bonds

where,

Annual interest payment is

= $15,000 × 2

= $30,000

And, the Issued amount of debenture bonds is $500,000

So, the annual stated interest is

= $30,000 ÷ $500,000

= 6%