Table 15-3
Redding Corporation issued $400,000 of 10%, five-year bonds. The bonds are dated and sold on February 1, 2017. Interest payment dates are February 1 and August 1. The market interest rate is 8% and the bonds are sold for $432,442. The company uses the effective-interest method of amortization.
-Refer to Table 15-3.When you prepare the effective-interest method of amortization schedule for this bond,the interest expense should be ___________ then the semiannual interest payment?

Question

Quizplus · Accepted Answer

Under the effective-interest method, the interest expense is calculated based on the carrying amount of the bond and the market interest rate. Since the bonds were sold at a premium (above face value), the carrying amount of the bond decreases over time as the premium is amortized. This results in the interest expense being lower than the semiannual interest payment, which is based on the stated interest rate of the bond.

Table 15-3 Redding Corporation Issued $400,000 of 10%, Five-Year Bonds. the Bonds