Gunnison County issued a $500,000,10 percent,10-year bond on January 1,2014,for 113.6 when the effective interest rate was 8 percent.Interest is payable on June 30 and December 31.Gunnison uses the effective-interest method to amortize all premiums and discounts.
-How much interest expense should Gunnison record on December 31,2014?

Question

Quizplus · Accepted Answer

The interest expense is calculated using the effective interest rate on the carrying amount of the bond. The bond was issued at a premium (113.6% of $500,000 = $568,000). The interest expense for the first six months is 8% annual rate / 2 (for semiannual) * $568,000 = $22,720. For the second six months, the interest expense is calculated on the adjusted carrying amount (initial carrying amount + first six months' premium amortization - first six months' cash interest paid). Without the exact premium amortization amount, we directly look at the options provided, and the closest to the expected calculation method is D) $22,628.80, assuming the slight difference is due to the premium amortization adjustment.

Gunnison County Issued a $500,000,10 Percent,10-Year Bond on January 1,2014,for