Question

Tan Corporation issued $600,000,000 of 7% bonds on November 1, 2015, for $644,636,000. The bonds were dated November 1, 2015, and mature in 10 years, with interest payable each May 1 and November 1. The effective-interest rate is 6%. Prepare Tan’s December 31, 2015, adjusting entry. Use effective rate method of amortization

Answer 1

Answer:

Interest Expense $6,446,360

Interest Payable $7,000,000

Explanation:

Interest Expense for the year =

Issued amount * Effective interest rate * $\frac{Remaining months in the year}{Total months in the year}$

$644,636,000 * 0.06 * 2/12 = $6,446,360

Interest Payable =

Face Value of the bond * Interest rate * $\frac{Remaining months in the year}{Total months in the year}$

$600,000,000 * 0.07 * 2/12 = 7,000,000