At the beginning of 2010, Wallace Corporation issued 10% bonds with a face value of $900,000.These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31.The bonds were sold for $833,760 to yield 12%.Wallace uses a calendar-year reporting period.Using the effective-interest method of amortization, what amount of interest expense should be reported for 2010? (Round your answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

To calculate the interest expense for 2010, we need to follow these steps:
1. Calculate the total interest payment for the year:

Face value of bonds x coupon rate = $900,000 x 10% = $90,000 
2 semiannual interest payments = $90,000/2 = $45,000

2. Calculate the bond discount:

Bond issue price - face value = $833,760 - $900,000 = -$66,240

3. Calculate the effective interest rate:

Interest expense / carrying value of bond liability = x 
$45,000 / carrying value = x

Carrying value = issue price - discount: 
Carrying value = $833,760 - (-$66,240) = $900,000

Therefore, 
x = $45,000 / $900,000 = 5%

Effective Interest Rate = 2 x 5% = 10%

4. Calculate the interest expense:

Interest expense = Effective interest rate x carrying value of bond liability 
Interest expense = 10% x $900,000 = $90,000

So, for the first interest payment on June 30, 2010, interest expense would be:

Carrying value of bond liability x semiannual effective interest rate 
$900,000 x 5% = $45,000

For the second interest payment on December 31, 2010, interest expense would be:

( Carrying value of bond liability - 1st payment of principal) x semiannual effective interest rate 
($900,000 - $45,000) x 5% = $42,750

Total interest expense for 2010 would be: $45,000 + $42,750 = $87,750

Therefore, the closest answer is B) $100,353.

At the Beginning of 2010, Wallace Corporation Issued 10% Bonds