On January 1,2017,Chain,Inc.issued $400,000,ten-year,10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.The interest expense on the bonds at June 30,2017 is

Question

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First, we need to calculate the bond interest payable for the first six months (January 1, 2017, to June 30, 2017), which is calculated using the effective interest rate method:

Effective interest rate = (1 + market rate/2) * (1 + market rate/2) - 1 
Effective interest rate = (1 + 0.12/2) * (1 + 0.12/2) - 1 
Effective interest rate = 0.0616 or 6.16%

Bond interest payable = carrying value of bonds * effective interest rate * time 
Bond interest payable = $354,200 * 0.0616 * 6/12 
Bond interest payable = $10,626

Since the bonds were issued on January 1, 2017, the company would have to pay interest for only six months in 2017. Therefore, the interest expense on the bonds at June 30, 2017, is $10,626, and the answer is C ($21,252 for the entire year).