Kaleidoscope Paint
On January 1, 2019, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
-Refer to Kaleidoscope Paint. The interest expense on the bonds at June 30, 2019, is

Question

Quizplus · Accepted Answer

To calculate the interest expense on the bonds at June 30, 2019, using the effective interest method, we need to follow these steps:
1. Calculate the interest payment based on the face value of the bonds and the stated interest rate.
2. Calculate the interest expense based on the carrying amount of the bonds and the market interest rate.
3. Determine the amortization of the bond discount for the period.
Let's go through each step:
1. Interest Payment:
The stated interest rate is 9%, and the face value of the bonds is $500,000. The bonds pay interest semiannually, so we calculate the interest payment for six months:
Interest Payment = Face Value x (Stated Interest Rate / 2)
Interest Payment = $500,000 x (9% / 2)
Interest Payment = $500,000 x 0.045
Interest Payment = $22,500
2. Interest Expense:
The market interest rate is 10%, and the bonds were issued at a discount, with a carrying amount of $480,745. We calculate the interest expense for six months using the market rate:
Interest Expense = Carrying Amount x (Market Interest Rate / 2)
Interest Expense = $480,745 x (10% / 2)
Interest Expense = $480,745 x 0.05
Interest Expense = $24,037.25
3. Amortization of Bond Discount:
The difference between the interest payment and the interest expense is the amount by which the bond discount is amortized for the period:
Amortization of Bond Discount = Interest Expense - Interest Payment
Amortization of Bond Discount = $24,037.25 - $22,500
Amortization of Bond Discount = $1,537.25
The carrying amount of the bonds will increase by the amortization amount for the next period's calculation.
The interest expense on the bonds at June 30, 2019, is the interest expense calculated using the market rate, which is $24,037.25. Therefore, the correct answer is:
b. $24,037 (rounded to the nearest dollar).

Kaleidoscope Paint On January 1, 2019, This Company Issued $500,000, 10-Year, 9