Bowlin Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Bowlin's fiscal year ends on December 31 and the company uses the effective interest method of amortization. The interest expense for the six months ending December 31, 2017 is:

Question

Quizplus · Accepted Answer

Bonds were issued at a discount ($1,000,000 - $937,790 = $62,210) because the market rate of interest was higher than the coupon rate (10% > 9%). Under the effective interest method, the total interest expense over the life of the bond is allocated to each period based on the carrying value of the bond at the beginning of the period and the effective interest rate (market rate at the time of issuance).

Effective interest rate = 10%
Carrying value at issuance = $937,790

Interest expense for the first six months will be:
= Carrying value x Effective interest rate x Time
= $937,790 x 10% x 6/12
= $46,889.50

Therefore, the answer is option C.

Bowlin Company Issued $1,000,000 of 9 Percent, Ten-Year Bonds for $937,790