Question

Kloss Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Kloss issued the bonds for $255,369,000, what interest expense would it recognize in its 2021 income statement?

Answer 1

Answer:

$256,196,490      

Explanation:

The computation of the interest expense recognized in 2021 income statement is shown below:

For cash interest for 3 months, it would be

= $300,000,000 × 4% × 3 months ÷ 12 months

=  $3,000,000

For 3 months, it would be

= $255,369,000 × 6% × 3 months ÷ 12 months

=  $3,830,490    

The change in carrying value is

=  $3,830,490  - $3,000,000

= $830,490

So, the interest expense is

= $255,369,000 + $830,490

=  $256,196,490      

The 3 months is calculated from October 1 to December 31