On January 1, 2016, Snow, Inc. issued $50,000 of ten-year 6% bonds for $43,800. Interest was payable semiannually. The effective yield was 8%. The effective interest method of discount amortization was used. What amount of interest expense should be recorded for the six-month period ending December 31, 2016?

Question

Quizplus · Accepted Answer

The interest expense for the period is calculated using the effective interest rate on the carrying amount of the bonds at the beginning of the period. The carrying amount at issuance is $43,800, and the effective interest rate is 8% annually, or 4% semiannually. Thus, the interest expense for the six-month period is 4% of $43,800, which equals $1,752. However, since the bonds were issued at a discount, the carrying amount increases over time as the discount is amortized. Therefore, the interest expense for the second six-month period of 2016 would be slightly higher than for the first six-month period. Given the options, the closest and correct answer reflecting the effective interest method for a six-month period ending December 31, 2016, would be $1,762.