On January 1, 2017, Chin Corporation issued $2,600,000, 16%, 5-year bonds. The bond interest is payable on January 1 and July 1. The bonds sold for $2,819,600. The market rate of interest for these bonds was 14%. Under the effective-interest method, what is the interest expense for the six months ending July 1, 2017?

Question

Quizplus · Accepted Answer

The interest expense under the effective-interest method is calculated by multiplying the carrying amount of the bonds at the beginning of the period by the market rate of interest. For the first six months, the carrying amount is $2,819,600 and the market rate is 14% annually, or 7% for six months. Thus, the interest expense is $2,819,600 * 7% = $197,372.

On January 1, 2017, Chin Corporation Issued $2,600,000, 16%, 5-Year