Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1,2012.The stated interest rate on these bonds is 9%.If the effective interest rate is 10.33%,interest expense in 2012 is equal to

Question

Quizplus · Accepted Answer

The effective interest rate is higher than the stated interest rate, so the interest expense will be higher than the interest paid. We can calculate the interest expense using the effective interest method as follows:

Year 1:
Carrying value = $200,000 x 0.95 = $190,000
Interest expense = $190,000 x 0.1033 = $19,627

Therefore, the answer is (D) $19,627.

Juneau Company Issued 5-Year $200,000 Face Value Bonds at 95