On January 1, 2017, Trout Corp.sold $500,000, 10% bonds for $442,648 to yield 12%.Interest is payable semi-annually on January 1 and July 1.Trout uses the effective-interest method of amortizing bond discount.What amount should Trout report as interest expense for the six months ended June 30, 2017?

Question

Quizplus · Accepted Answer

Using the effective-interest method, interest expense is calculated as the carrying value of the bond multiplied by the effective interest rate.

Effective interest rate = (1+(12%/2))^2 - 1 = 12.36%

Interest expense for the period = Carrying value of the bond x Effective interest rate x Time

Time = 6/12 = 0.5

Carrying value of the bond as of January 1, 2017 = $442,648

Carrying value of the bond as of June 30, 2017 = $442,648 + ($500,000 x 12.36% x 0.5) - $25,000 (semi-annual interest payment) = $469,207

Therefore, interest expense for the six months ended June 30, 2017 = $469,207 x 12.36% x 0.5 = $26,559.