NBC Corporation issued $600,000,10%,5-year bonds on January 1,2014 for $648,930 when the market interest rate was 8%.Interest is paid semiannually on January 1 and July 1.The corporation uses the effective-interest method to amortize bond premium.The total amount of bond interest expense recognized on July 1,2014 is:

Question

Quizplus · Accepted Answer

The annual interest payment is $60,000 ($600,000 x 10%). 
The effective interest rate is 8.16% [2 x 0.08 x (1 + 0.08/2)].

To calculate interest expense from January 1, 2014, to July 1, 2014, we need to find the interest accrued during that period.

Interest accrued during the period = Carrying value at the beginning of the period x Effective interest rate x Time 
= $648,930 x 8.16% x 6/12 = $26,057

Bond interest expense recognized on July 1, 2014, consists of the interest payment of $30,000 and the amortization of bond premium.

Amortization of bond premium = Total bond premium / Number of interest payment periods 
= ($648,930 - $600,000) / 10 = $4,893

Therefore, bond interest expense recognized on July 1, 2014 = $30,000 + $4,893 = $25,957.

NBC Corporation Issued $600,000,10%,5-Year Bonds on January 1,2014 for $648,930