On January 2, 2014, Muslin Ltd.sold five year, 8% bonds with a face value of $900,000. Long-Term Financial Liabilities 14- 15 Interest will be paid semi-annually on June 30 and December 31.The bonds were sold for $830,400 to yield 10%.Using the effective interest method of amortization of bond discount or premium, interest expense for 2014 is

Question

Quizplus · Accepted Answer

The interest expense using the effective interest method is calculated by multiplying the carrying amount of the bonds at the beginning of the period by the market rate of interest. For the first period, the carrying amount is $830,400 and the market rate is 10% annually, or 5% semi-annually. Thus, the interest expense for each period is $830,400 * 5% = $41,520. Since interest is paid semi-annually, the total interest expense for 2014 (two periods) is $41,520 * 2 = $83,040. However, the correct choice is C, $83,316, which accounts for the amortization of the bond discount over the year.