Exhibit 14-10
Hawk issued $500,000 of its ten-year 5% bonds for $463,197 on October 1, 2016 so as to yield an effective rate of 6%. Interest is paid each October 1 and April 1
-Refer to Exhibit 14-10. Assuming Hawk uses the effective interest method, the adjusting entry on December 31, 2016, would include rounded to the nearest dollar)

Question

Quizplus · Accepted Answer

The effective interest method calculates interest expense based on the carrying amount of the bond and the effective interest rate. For the period from October 1 to December 31, the interest expense is calculated as $463,197 * (6%/2) = $13,896. The cash interest paid is $500,000 * (5%/2) = $12,500. The difference, $1,396, is the amortization of the discount, half of which is $698 for the quarter.

Exhibit 14-10 Hawk Issued $500,000 of Its Ten-Year 5% Bonds for $463,197