On January 1,20A,Winston Corporation sold a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used,the interest expense on the 20A income statement would be which of the following amounts (to the nearest dollar)?

Question

Quizplus · Accepted Answer

The effective interest method requires allocating the difference between the bond's face value and the initial issue price (i.e., $10,000 - $9,668 = $332) over the bond's life as an additional interest expense. This adjustment is necessary because the bond's effective interest rate of 8% is higher than the stated rate of 7%, which means that the bond was sold at a discount (i.e., below face value).

To calculate the bond's interest expense for 20A, we can use the following formula:

Interest expense = Beginning carrying value x Effective interest rate

At the bond's issuance, the carrying value is equal to the bond's issue price (i.e., $9,668). The effective interest rate is 8%. Therefore, the interest expense for 20A is:

Interest expense = $9,668 x 8% = $773.44

Rounding to the nearest dollar gives us a final answer of $773, which is choice (B).

On January 1,20A,Winston Corporation Sold a Four-Year,$10,000,7% Bond