Question

Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $325 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2019. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $276,649,555, what interest expense would it recognize in its 2018 income statement? (Do not round intermediate calculations and round final answer to nearest whole dollar.)

Answer 1

Answer: Interest expense = $1,383,248

Explanation:

Given :

Issue price of the bond = $276,649,555

Coupon rate = 4%

Effective interest rate  =  6%

Semi annual effective interest rate = $6\times\frac{4}{12}$ = 2%

Time period will be 3 months (October 1, 2018 - December 31, 2018)

We will compute the interest expense that will be recognized in 2018 income statement as :

Interest expense = Issue price $\times$ Semi annual effective interest rate $\times$  Time period

Interest expense = $276,649,555 $\times$ 2% $\times$$\frac{3}{12}$

Interest expense = $1,383,248