On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, the interest expense for the six-month period ending December 31, 2014 is closest to:
A) $24,000.
B) $20,491.
C)$20,000.
D)$20,825.

Question

Quizplus · Accepted Answer

The correct answer is B.The interest expense for the six-month period ending December 31, 2014 is $20,491. This is calculated as follows:Interest expense = Carrying value of bonds x Effective interest rate x TimeCarrying value of bonds = $413,153Effective interest rate = 10% / 2 = 5%Time = 6 months / 12 months = 0.5Interest expense = $413,153 x 5% x 0.5 = $20,491

On January 1, 2014, a Corporation Issued $400,000 of 10-Year