Roarie Inc issued $200,000, 7%, 5-year bonds. The current market rate was 7.5%.Roarie received $197,947 for the bonds. Using the effective interest method, the amount of interest expense to be recorded for the first semiannual payment was:

Question

Quizplus · Accepted Answer

The interest expense is calculated using the market rate of 7.5% on the carrying amount of the bonds. The carrying amount is $197,947, and the semiannual market rate is 3.75% (7.5% annual rate divided by 2). Therefore, the interest expense for the first semiannual period is $197,947 * 3.75% = $7,423.01.

Roarie Inc Issued $200,000, 7%, 5-Year Bonds