Question

Windsor, Inc., issues 7%, 10-year bonds with a face amount of $1 million on January 1, Year 1, for $932,048, when the market rate of interest is 8%. Interest expense associated with this bond for the first semiannual period is:

Answer 1

Answer:

The Interest expense associated with this bond for the first semiannual period is $35,000.

Explanation:

interest expense for first semi annual period  = $1,000,000*7%*1/2  

                                                                           = $35,000

Therefore, The Interest expense associated with this bond for the first semiannual period is $35,000.

Answer 2

Answer:

$76795.20

Explanation:

The bond is issued on discount when the issuance price is less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Face Value of the Bond = $1,000,000

Issuance Value = $932,048

Discount amount = $1,000,000 - $932,048 = $67,952

Journal Entry Will be as follow

Dr. Cash                        $932,048

Dr. Discount on Bond  $67,952

Cr. Bond Payable         $1,000,000

Discount is amortized over the 10 year life of the bond.

Discount amortization = $67,952 / 10 = $6795.2

Coupon payment = 1,000,000 x 7% = $70,000

Total Interest Expense = $70,000 + $6795.2 = $76795.20