Question

On January 1, 2019, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semiannually 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. The interest expense for the six-month period ending December 31, 2019 is closest to:

Answer 1

Answer:

interest expense for 6 months is $ 20658

Explanation:

Given data:

Total price of bond $400,000

Duration of bonds is 10 year

interest rate on bond is 12%

issue price on bond is $413,153 at 10% market rate

The calculation for interest expense for 6 months is given below:

=$Issue\ price \times market\ rate\ of\ interest \times \frac{number\ of months for\ interest}{(no.\ of\ months \in\ a \ year)}$$= 413,153 \times 10\% \times \frac{6}{12}$

= 20658

The six months is taken from Jan 1  to 30 th June 2016