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% market interest rate. Assuming the effective-interest method of amortization is used, and rounding all calculations to the nearest whole dollar, what is the interest expense for the six-month period ending June 30, 2014?

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Quizplus · Accepted Answer

The interest expense is calculated using the market interest rate of 10% on the carrying amount of the bonds. The carrying amount is $413,153, so the interest expense for six months is $413,153 * (10% / 2) = $20,658.

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