Question

On January 1, a company issued 7%, 15-year bonds with a face amount of $90 million for $82,218,585 to yield 8%. Interest is paid semiannually. What was interest expense at the effective interest rate on June 30, the first interest date

Answer 1

Answer:

The interest expense therefore at the effect rate on June 30 is $3,288,743 which will be debited to the interest expense account

Explanation:

First we need to understand the information peculiar to the question

The Face value of the bonds = $90,000,000

The Price of the Bond = $82,218, 585

Coupon rate= 7%

Also, the interest on the bond is to be paid semi annually

Secondly, we calculate the semi-annual interest as a function of the face amount

= Semi-annual period x Coupon rate x $90,000

= 6/12 x 0.07 x $90,000,000

= $3,150,000

Thirdly, we calculate the semi annual interest issued this time at the market price of the bond

= The effective rate (/2 since it is semi-annual) x the outstanding balance

= 8/2 x $82, 218,585

= $3, 288,743

The interest expense therefore at the effect rate on June 30 is $3,288,743 which will be debited to the interest expense account and the difference between this rate and the face amount calculated (138,743) will be credited to the discount on bonds payable.