On January 1, 2009, 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, 2009, in the amount of:

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of interest expense for the six months ending on June 30, 2009. We can do this by multiplying the carrying value of the bonds (i.e., the amount the bonds were sold for) by the effective interest rate for the period.

Carrying value = $177,000 
Effective interest rate = (1 + 0.12/2)^2 - 1 = 0.2544 (i.e., 25.44%)

Interest expense for 6 months = $177,000 x 0.2544 x 6/12 = $10,620

Therefore, the correct answer is C.

On January 1, 2009, Legion Company Sold $200,000 of 10