On January 2, 2010, a calendar-year corporation sold 8% bonds with a face value of $600,000.These bonds mature in five years, and interest is paid semiannually on June 30 and December 31.The bonds were sold for $553,600 to yield 10%.Using the effective-interest method of computing interest, how much should be charged to interest expense in 2010?

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Quizplus · Accepted Answer

The interest expense is calculated using the effective interest rate of 10% on the carrying amount of the bonds. For the first period, the interest expense is $553,600 * 5% = $27,680. For the second period, the carrying amount is adjusted by adding the amortized discount, and the interest expense is recalculated. The total interest expense for 2010 is $27,680 + $27,864 = $55,544.

On January 2, 2010, a Calendar-Year Corporation Sold 8% Bonds