Question

Ohlson Co. is preparing an Excel spreadsheet for its 20-year, 4.5%, $500,000 bonds payable. The bonds were issued on January 1 to yield 5% annually. Interest is paid semi-annually. A portion of the spreadsheet appears as follows: A B C D E 1 Stated rate: 0.045 2 Effective rate: 0.05 3 Face amount: 500,000 4 Term to maturity in years: 20 5 6 Period Cash Payment Interest Expense Change in Discount Outstanding Balance 7 0 8 1 9 2 What formula should Ohlson use in cell C8 to calculate interest expense for the first interest payment? Multiple Choice =E7*B3/2 =E7*B3 =B8 – D8 =E7*C2/2

Answer 1

Answer:

=E7*C2/2

Explanation:

The interest expense will be the carrying value of the bond times the effective interest rate.

On cell C8 we have the interest expense

On E7 we have the carrying value which is the outstanding balance.

Then, on C2 we got the effective rate

As this is an annual formula, we must divide by two to convert to semiannual rate.

A file is attached for how the excel sheet looks like