Question

Issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will be recognized in 2018?
A. $780,000
B. $784,249
C. $784,166
D. $390,000

Answer 1

Answer:

B. $784,249

Explanation:

The effective interest amortization is an accounting practice used for discounting a bond. This method isused for bonds sold at a discount; the amount of the bond discount is amortised as interest expense over the bond's life

Interest expenses for 6 months from Jan 1st to Jun 30th is $392,083 = $9,802,072* 8%/2

Amortization of Discount is $2,083= $9,802,072* 8%/2 - 10,000,000*7.8%,/2

Carry Amount of Bond on June 30 $9,804,155= bond proceed of $9,802,072 + Amortization of Discount is $2,083

Interest expenses for 6 months from Jul 1st to Dec 31st is  $392,166 = Carry amount of Bond $9,804,155 x effective rate 8%/2

Total interest expense will be recognized in 2018 is $784,249 = $392,083 + $392,166