On January 1, 2011, Chang Company sold HK$10,000,000 of its 10%, bonds for HK$8,852,960, a yield of 12%.Interest is payable semiannually on January 1 and July1.The June 30, 2011 entry to record the first interest payment will include

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The first interest payment will be for half a year, from January 1 to June 30. The bond has a face value of HK$10,000,000 and an annual interest rate of 10%. Therefore, the semi-annual interest payment is HK$500,000 (10% x HK$10,000,000 x 1/2). The bond was sold at a discount, meaning the company received less than the face value, so the effective interest rate is higher than 10%. In this case, the yield was 12%, which means that the effective interest rate is also 12%. To calculate the interest expense, we need to multiply the carrying value of the bond (the amount of the bond after the discount is applied) by the effective interest rate.

Carrying value of the bond: HK$8,852,960 
Effective interest rate: 12% 
Interest expense for the first semi-annual payment: HK$531,178

Therefore, the June 30, 2011 entry to record the first interest payment will include a debit to Bonds Payable for HK$531,178.

On January 1, 2011, Chang Company Sold HK$10,000,000 of Its