Question

On January 1, Year 1, Chaco Company sold $300,000 of 10% twenty-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were issued for $359,378, priced to yield 8%. What is the amount of effective interest expense that Chaco will record for the six months ended June 30, Year 1

Answer 1

Answer:

The amount of effective interest expense that chaco will record in the first six months is $14,375

Explanation:

interest payment that will be first made is on June 30, Year 1. Therefore, the outstanding balance used in the calculation is the issue price.

The interest expense is calculated by these formula

Interest expense = Effective semiannual interest rate × Outstanding balance

Interest expense = (8% ÷ 2) × $359,378 = $14,375

So the interest expense is gotten as %14,375

Answer 2

Answer:

$14,375

Explanation:

Interest expense = Effective interest for first interest period × Period of time covered by adjusting entry.

Therefore:

Interest expense = 8%× $359,378 = $28,759.24

$28,759.24/2 = $14,375

The adjusting entry will record interest for the June 30 Year 1 will include a debit to Interest Expense in the amount of $14,375.

Hence,

Dr Interest Expenses $14,375

The amount of interest expense that should be accrued by chaco in an adjusting entry dated June 30, Year 1 is $14,375