Question

At the beginning of 2020, Wallace Corporation issued 10% bonds with a face value of $6000000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $5558400 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2020

Answer 1

Answer:

$669,018

Explanation:

The bond is issued on discount when the bond issuance proceeds are 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 = $6,000,000

Sale Proceeds = $5,558,400

Discount on the bond = Face value - cash proceeds = $6,000,000 - $5,558,400 = $441,600

This Discount will be amortized over the bond's life till maturity and added to interest expense.

Coupon Payment = Face Value x Coupon Rate = $6,000,000 x 10% = $600,000 per years = $300,000 per six months

First half of year

Interest Expense = $5,558,400 + 12% x 6/12 = $333,504

Book value = $5,558,400 + (333,504 - $300,000) = $5,591,904

Second half of year

Interest Expense = $5,591,904 + 12% x 6/12 = $335,514

Total Expense in the year = $333,504 + $335,514 = $669,018

Answer 2

Answer:

The amount of interest expense to be reported is $669,018

Explanation:

Under the method referred to as the effective interest, the interest  of expense is determined by the market yield computed on the book value of the bond and the difference between the coupon and the yield payment is called the discount amortization amount.