On January 1, 2016, Chain, Inc.issued $400,000, 10-year, 10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.The interest expense on the bonds at June 30, 2016, is

Question

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To calculate interest expense, we need to find the effective interest rate using the present value of the bond and the bond's cash flows. 
Present value of the bond = $354,200 
Cash flow per period = ($400,000 × 10%)/2 = $20,000 
Calculate interest expense for the first 6-month period: 
Interest expense = (Present value of the bond × Market rate) ÷ 2 
Interest expense = ($354,200 × 12%) ÷ 2 = $21,252