Question

On January 1, a company issued 6%, 10-year bonds with a face amount of $60 million for $55,736,520 to yield 7%. Interest is paid semiannually. What was interest expense at the effective interest rate on June 30, the first interest date? (Enter your answers in whole dollars. Round percentage answers to 1 decimal place (e.g., 0.0234 should be entered as 2.3).)

Answer 1

Answer:

Effective interest on June 30 on a 6% $60 million bond at 7% effective rate is $1,950,778

The interest is treated in the books of account thus:

Debit interest expense     $1,950,778

Credit Bond account                               $1,950,778  

Explanation:

The effective interest is computed using the below formula

Amount x Effective Rate (%) = Interest Expense

Amount=$55,736,520

Effective rate =7%/2 =3.5% semi-annually

Interest expense=$55,736,520*3.5%

Interest expense=$1,950,778