On January 1,2014,Roger Inc.issued its 10 percent bonds in the face amount of $1,500,000.They mature on January 1,2024.The bonds were issued for $1,329,000 to yield 12 percent,resulting in bond discount of $171,000.Roger uses the effective-interest method of amortizing bond discount.Interest is payable July 1 and January 1.For the six months ended June 30,2014,Roger should report bond interest expense of

Question

Quizplus · Accepted Answer

The annual interest on the bonds is $150,000 ($1,500,000 x 10%). Since the bonds were issued at a discount of $171,000, the effective interest rate is higher than the stated rate of 10%. Using the effective-interest method, interest expense is calculated as the carrying value of the bond liability at the beginning of the period multiplied by the effective-interest rate (12%).

Carrying value of bonds at Jan. 1, 2014: $1,329,000 
Effective-interest rate: 12%

Interest expense for Jan. 1 - June 30, 2014: 
($1,329,000 x 12%) x (6/12) = $79,740