Silk Company issued $500,000 of 7%, 10-year bonds on its interest date for $431,850 to yield an effective annual rate of 9%.The effective-interest method of amortization is to 1.How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?

Question

Quizplus · Accepted Answer

To calculate the bond interest expense for the first year, we need to use the effective-interest method of amortization. This involves calculating the interest expense based on the carrying value of the bond at the beginning of each period and adjusting it for the amortization of any premium or discount.

First, we need to calculate the semi-annual coupon payment:
Coupon payment = Face value x Coupon rate x Time period
Coupon payment = $500,000 x 7% x 6/12
Coupon payment = $17,500

Next, we need to calculate the bond's carrying value at the end of the first six-month period. Since the bond was issued at a discount, the carrying value will increase over time as the discount is amortized.
Carrying value at end of first period = Issue price + Amortized discount
Issue price = $431,850
Discount = Face value - Issue price = $500,000 - $431,850 = $68,150
Amortized discount = Discount x Effective interest rate
Amortized discount = $68,150 x 9% = $6,136.50
Carrying value at end of first period = $431,850 + $6,136.50 = $437,986.50

Finally, we can calculate the bond interest expense for the first year:
Bond interest expense = Carrying value at beginning of period x Effective interest rate
Bond interest expense = $431,850 x 9% = $38,870.50
Round to the nearest dollar, the answer is B: $38,867.

Silk Company Issued $500,000 of 7%, 10-Year Bonds on Its