212. On January 1, Dade Corporation issued $3,000,000, 7%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 6%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for

Question

Quizplus · Accepted Answer

To calculate the interest expense using the effective-interest method, we first need to find the bond's carrying value, which is the present value of the bond's future cash flows, including both the principal repayment and the interest payments.

The carrying value of the bond can be calculated as follows:

PV of principal repayment = $3,000,000
PV of interest payments = $180,303 (($3,000,000 x 7% x 6/12) / (1 + 6%) + ($3,000,000 x 7%)) + (($3,000,000 x 7% x 6/12) / (1 + 6%))
Carrying value = $3,180,303

Therefore, for the first interest payment, the interest expense can be calculated as:

Interest expense = Carrying value x Market interest rate
Interest expense = $3,180,303 x 6%
Interest expense = $192,977

Thus, the correct answer is C) $192,977.