On January 1, 2013, 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, 2013, in the amount of:

Question

Quizplus · Accepted Answer

The effective interest rate is 12%, which means that the interest expense is calculated based on the carrying value of the bonds ($177,000) and not the face value ($200,000). 
The semiannual interest payment can be calculated as: 
($177,000 x 12%) / 2 = $10,620 
Therefore, the bond interest expense for the six months ended June 30, 2013, is $10,620.

On January 1, 2013, Legion Company Sold $200,000 of 10