On January 1,2014,Gustavo Hospital issued a $250,000,10 percent,5-year bond for $231,601.Interest is payable on June 30 and December 31.Gustavo uses the effective-interest method to amortize all premiums and discounts.Assuming an effective interest rate of 12 percent,how much interest expense should be recorded on June 30,2014?

Question

Quizplus · Accepted Answer

The interest expense under the effective interest method is calculated by multiplying the carrying amount of the bond at the beginning of the period by the effective interest rate. The carrying amount at issuance is $231,601, and the effective interest rate is 12% annually, or 6% semiannually (since interest is paid every six months). Therefore, the interest expense for the first six months is $231,601 * 6% = $13,896.06.

On January 1,2014,Gustavo Hospital Issued a $250,000,10 Percent,5-Year Bond for $231,601.Interest