A corporation issued $200,000, 10%, 5-year bonds on January 1, 2013 for $216,222 which reflects an effective interest rate of 8%. Interest is paid semi-annually on January 1 and July 1. The amount of bond interest expense to be recognized on July 1, 2013, is

Question

Quizplus · Accepted Answer

The bond interest expense for a period is calculated using the effective interest rate on the carrying amount of the bond at the beginning of the period. Here, the carrying amount of the bond at issuance is $216,222, and the effective interest rate is 8% annually, but since interest is paid semi-annually, we use half of this rate for the period's calculation, which is 4%. Therefore, the bond interest expense for the first six months is 4% of $216,222, which equals $8,649.

A Corporation Issued $200,000, 10%, 5-Year Bonds on January 1