Evans Corporation sells $200,000,10%,10-year bonds for 97 on January 1.Compute the semi-annual interest expense recorded on July 1 using the interest method.The market rate is 12%.

Question

Quizplus · Accepted Answer

The semi-annual interest payment is ($200,000 x 10%)/2 = $10,000.
On January 1, the bond sold for 97, which means it sold for 97% of its face value, or $194,000 ($200,000 x 97%).
The discount is the difference between the face value and the sale price, or $6,000 ($200,000 - $194,000).
The bond has a life of 20 semi-annual periods (10 years x 2 semi-annual periods per year).
The effective interest rate is the market rate adjusted for the discount or premium, which is (12% x 97%) = 11.64%.
Using the interest method, the interest expense recorded for the first semi-annual period is ($194,000 x 11.64%) = $22,609.60.
The amount of discount amortized for the first semi-annual period is ($6,000 / 20) = $300.
Therefore, the semi-annual interest expense recorded on July 1 would be ($22,609.60 - $300) = $22,309.60, or ($22,309.60 / 2) = $11,154.80. However, since we are only looking for the interest expense, we select answer choice D, $11,640.

Evans Corporation Sells $200,000,10%,10-Year Bonds for 97 on January 1