Rowan Corporation issued ten-year term bonds on January 1,2013,with a face value of $400,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $345,480 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.The entry to be recorded on December 31,2013,for the payment of interest (rounded to the nearest dollar)and the amortization of discount is:

Question

Quizplus · Accepted Answer

The semi-annual interest payment on the bonds can be calculated using the following formula:

Interest payment = Face value x Face interest rate x Time period
                    = $400,000 x 6% x 6/12
                    = $12,000

The amortization of discount can be calculated using the effective interest method. The first step is to calculate the annual interest expense using the following formula:

Annual interest expense = Carrying value x Effective interest rate
                                   = ($345,480 + $1,892) x 8%
                                   = $29,680

The amortization of discount for the period can be calculated as follows:

Amortization of discount = Annual interest expense - Interest payment
                                      = $29,680 - $12,000
                                      = $17,680

Therefore, the entry on December 31, 2013, would be:

Bond Interest Expense         $13,892    ($29,680/2 rounded to nearest dollar)
Unamortized Bond Discount   $1,892      ($17,680/2 rounded to nearest dollar)
Cash                                  $12,000

Rowan Corporation Issued Ten-Year Term Bonds on January 1,2013,with a Face