On January 1,2016,Legion Company sold $200,000 of 10% ten-year bonds.Interest is payable semiannually on June 30 and December 31.The bonds were sold for $177,000,priced to yield 12%.Legion records interest at the effective rate.Legion should report bond interest expense for the six months ended June 30,2016,in the amount of:

Question

Quizplus · Accepted Answer

Step 1: Calculate the amount of interest to be paid semi-annually. 
The face value of the bonds is $200,000 and the coupon rate is 10%, so the interest paid semi-annually is: 
$200,000 x 10% x 6/12 = $10,000

Step 2: Calculate the semi-annual interest expense using the effective interest method. 
The bonds were sold for $177,000, so the discount is: 
$200,000 – $177,000 = $23,000

The effective interest rate is 12%, so the semi-annual interest expense is: 
$177,000 x 12% x 6/12 = $10,620

Therefore, the answer is C) $10,620

On January 1,2016,Legion Company Sold $200,000 of 10% Ten-Year Bonds