Question

Douglas Company issued 5-year bonds on January 1. The 12% bonds have a face value of $35,000,000 and pay interest every January 1 and July 1. The bonds sold for $37,702,483 based on the market interest rate of 10%. Douglas Company uses the effective interest rate method to amortize bond discounts and premiums. On July 1 of the same year, Douglas Company should record interest expense (rounded to the nearest dollar) of

Answer 1

Answer:

Given:

12% bonds have a face value of $35,000,000

Bonds sold for $37,702,483 based on the market interest rate of 10%.

∴

The interest expense on July 1 can be computed as

Interest expense = Bonds sold × Effective market interest rate ($\frac{10}{2}$ = 5%)

= $37,702,483 × .05 (1/2 of the effective interest rate)

= $1,885,124

⇒ The interest expense on July 1 is $1,885,124