On January 1, 2020, Helium Corp. sold $ 500,000, 4% bonds for $ 477,102 to yield 6%. Interest is payable semi-annually on January 1 and July 1. Helium uses the effective-interest method of amortizing bond discount. What amount should Helium report as interest expense for the six months ended June 30, 2020?

Question

Quizplus · Accepted Answer

First, we need to determine the amount of bond discount that needs to be amortized each period. The bond discount is the difference between the face value of the bonds ($500,000) and the amount Helium received when they sold the bonds ($477,102).

Bond discount = $500,000 - $477,102 = $22,898

Next, we need to calculate the semi-annual interest payment. The bond pays 4% annually, so the semi-annual interest rate is 2% (4% / 2). The face value of the bond is $500,000, so the semi-annual interest payment is:

Semi-annual interest payment = $500,000 x 2% = $10,000

Using the effective-interest method, we need to amortize the bond discount and calculate the interest expense accordingly.

For the six months ending June 30, 2020, there were two semi-annual interest payments of $10,000 each. The total interest expense for the period is the sum of these payments plus the amount of bond discount that was amortized during the period.

Bond discount amortized = $22,898 / 10 = $2,290.

Interest expense = $10,000 + $10,000 + $2,290 = $22,290

Therefore, the correct answer is B: $14,313.