Question

On January 1, Year 1, the Charleston Company (Charleston) issues bonds with a face value of $100,000 and a stated annual cash interest rate of 6% for $86,410 in cash to yield an assumed effective interest rate of 8%. Interest is paid every June 30th and December 31st, and the effective-rate method is being applied. What amount of interest expense should Charleston report for the year ending December 31, Year 2

Answer 1

Answer:

$7,007

Explanation:

Amount of payment = $100,000 * 3%

Amount of payment = $3,000

Interest expenses = Carrying amount * 4%

Amortization of discount = Amount of payment - Interest expenses

Carrying value = Previous carrying value + Current Amortization of discount

   Year          Amount of       Interest     Amortization     Carrying  

                     payment        Expenses     of discount        value

Jan 1, Y1                                                                                $86,410

Jun 30, Y1     $3,000            $3,456            $456              $86,866

Dec 31, Y1     $3,000            $3,475             $475              $87,341

Jun 30, Y2    $3,000            $3,494            $494               $87,835

Dec 31, Y2     $3,000            $3,513             $513               $88,348

Interest expense for December 31, Year 2 = $3,494 + $3,513 = $7,007. So, $7,007 is the amount of interest expense should Charleston report for the year ending December 31, Year 2.