Davis Corporation sells $200,000, 12%, 10-year bonds for 104 on January 1. Compute the semiannual interest expense recorded on July 1 using the interest method. The market rate is 8%.

Question

Quizplus · Accepted Answer

The semiannual interest expense using the interest method is calculated by multiplying the carrying amount of the bonds by the market rate divided by 2. The bonds are sold at a premium (104% of $200,000 = $208,000). The semiannual market rate is 4% (8% annual rate / 2). Therefore, the interest expense is $208,000 * 4% = $8,320.

Davis Corporation Sells $200,000, 12%, 10-Year Bonds for 104 on January