Question

Carmen Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Carmen Company uses the effective interest rate method to amortize bond discounts and premiums. On July 1 of the same year, Carmen should record interest expense (rounded to the nearest dollar) of

Answer 1

Answer:

Carmen would record an interest expense of $7,032

Explanation:

Bonds are debts instruments issued by corporates. Bonds are issued at par, premium and discount.

Carmen recorded interest is calculated as follows;

Interest (I) = ½VR

Where I = Interest

V = Face Value of the bond

R = Market Interest Rate

V = $117,205

R = 12%

Interest Expense = ½ * $117,205 * 12%

Interest Expense = 0.5 * $117,205* 0.12

Interest Expense = $7032.3

Interest Expense = $7032 ---- Approximated

Hence, Carmen would record an interest expense of $7,032

Answer 2

Answer: $7032.30

Explanation:

GIVEN THE FOLLOWING ;

BOND VALUE = $117,205

INTEREST RATE = 12%

Interest is been paid twice per year : 1st January and 1st July, meaning semi annually.

Therefore the interest rate of 12% on semiannual basis will be :

12% ÷ 2 = 6% = 0.06

Therefore,

Interest expense = bond value × interest rate

= $117,205 × 0.06 = $7032.30