Use the present value and future value tables included in Appendix 8 and on the textbook companion website.
-On January 1, 2012, Santos Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is payable on June 30 and December 31. Santos uses the effective-interest method to amortize all premiums and discounts. Assuming an effective interest rate of 12 percent, how much interest expense should be recorded on June 30, 2012?

Question

Use the present value and future value tables included in Appendix 8 and on the textbook companion website. 
-On January 1, 2012, Santos Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is payable on June 30 and December 31. Santos uses the effective-interest method to amortize all premiums and discounts. Assuming an effective interest rate of 12 percent, how much interest expense should be recorded on June 30, 2012?

Quizplus · Accepted Answer

First find the present value of the bond using the table:

PV = $231,601

Then find the semi-annual interest payment:

Interest payment = $250,000 x 10% x 6/12 = $12,500

Calculate the effective interest rate for the first period:

12% / 2 = 6%

Calculate the interest expense for the first period using the table:

Interest expense = PV x i = $231,601 x 6% = $13,896.06

Therefore, the correct answer is C) $13,896.06.

Use the Present Value and Future Value Tables Included in Appendix