On January 1, 2010, Huff Co.sold $1,000,000 of its 10% bonds for $885,296 to yield 12%.Interest is payable semiannually on January 1 and July 1.What amount should Huff report as interest expense for the six months ended June 30, 2010?

Question

Quizplus · Accepted Answer

Step 1: Find the annual interest payment
Interest payment = Face value of bonds x Annual interest rate
Interest payment = $1,000,000 x 10% = $100,000

Step 2: Find the semiannual interest payment
Semiannual interest payment = Annual interest payment / 2
Semiannual interest payment = $100,000 / 2 = $50,000

Step 3: Find the effective interest rate
PV = $885,296
FV = $1,000,000
n = 20 (semiannual periods)
PMT = $50,000
Using the calculator, solve for i (effective interest rate) = 12.73%

Step 4: Calculate interest expense for the six months ended June 30, 2010.
Interest expense = Beginning carrying value x Effective interest rate for the period
Beginning carrying value = $885,296
Effective interest rate for the period = 12.73% / 2 = 6.365%
Interest expense = $885,296 x 6.365% = $53,118

Therefore, the correct answer is C) $53,118.