Question

On January 1, 2021, Legion Company sold $250,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $163,976, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2021, in the amount of: (Round your answer to the nearest dollar amount.)

Answer 1

Answer:

$9,838.56  

Explanation:

Interest Expense using effective interest rate method can determined by multiplying the carrying value of the bond and yield rate of the bond because the bonds issued on the discount has different interest expense than the interest payment made to bond holder.

As the interest is paid semiannually the interest expense will be calculated for only 6 months.

Interest expense=Cash proceeds on issuance of bond x YTM x 6/12

As per given data

Cash proceeds are $163,976

YTM is 12%

Interest expense=$163,976 x 12% x 6/12=$9,838.56  

Answer 2

Answer:

The bond interest expense to be shown in profit or loss as t 30 June 2021

$9,838.56

Explanation:

The bond interest expense is the actual finance cost of using the funds made available by bondholders while the coupon payment is the portion of the finance cost paid to them periodically.

Interest expense=bonds cash proceeds*yield to maturity*6/12

bonds cash proceeds is $163,976

yield to maturity is 12%

interest expense=$163,976*12%*6/12=$9,838.56