Question

Designer Company issued 10-year bonds on January 1. The 10% bonds have a face value of $96,000 and pay interest every January 1 and July 1. The bonds were sold for $115,787 based on the market interest rate of 8%. Designer uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Designer should record an interest expense (round to the nearest dollar) of:______

Answer 1

Answer:

$ 4,631.48  

Explanation:

The interest expense is the cost of servicing the debt owed by the company to the bondholders while the coupon interest is the portion of the annual interest paid as cash to investors(bondholders)

Using the effective interest method,the interest expense which is the opening carrying value of the bond(cash proceeds) multiplied by the market rate of interest divided by 2(semiannually interest payment)

interest expense=$115,787*8%*6/12=$4,631.48  

The first interest expense on July 1 of the first year $ 4,631.48