On January 1, 2021, $ 1,000,000, 5-year, 5% bonds, were issued for $ 957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. What would be the amount of discount amortized on January 1, 2022?

Question

Quizplus · Accepted Answer

The discount amortized is calculated using the effective interest method. The interest expense for the period is the carrying amount of the bonds at the beginning of the period multiplied by the effective interest rate (6%/2 = 3% per semi-annual period). The cash interest paid is the face value of the bonds multiplied by the stated interest rate (5%/2 = 2.5% per semi-annual period). The difference between the interest expense and the cash interest paid is the discount amortized.

On January 1, 2021, $ 1,000,000, 5-Year, 5% Bonds, Were