On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. Rounding all calculations to the nearest whole dollar, what is the interest expense for the six-month period ending June 30, 2016?
A)$24,000.
B)$24,789.
C)$20,000.
D)$20,658.

Question

Quizplus · Accepted Answer

Step 1: Determine the semi-annual interest payment
$400,000 x 12% x 1/2 = $24,000

Step 2: Calculate the effective interest rate
PV = $413,153
FV = $800,000
N = 20 (10 years x 2 semi-annual periods)
PMT = $24,000
Solve for i = 5%

Step 3: Calculate the interest expense for the first semi-annual period
Carrying Value on January 1, 2016 = $413,153
Interest Expense = Carrying Value x Effective Interest Rate
Interest Expense = $413,153 x 5% = $20,658 (rounded to the nearest whole dollar)

Therefore, the correct answer is D) $20,658.

On January 1, 2016, a Company Issued $400,000 of 10-Year