Question

On January 1, 2020, Sheridan Company sold 10% bonds with a face value of $2750000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2973100 to yield 8%. Using the effective-interest method of amortization, interest expense for 2020 is

Answer 1

Answer:

$227,591.04

Explanation:

The computation of the interest expense is shown below;

The interest expense on the face value

= $2,750,000 × 10% × 6 months ÷ 12 months

= $137,500

And, the interest expense on the sale value

= $2,973,100 × 8% × 6 months ÷ 12 months

= $118,924

Now the closing balance would be

= $2,973,100 - $137,500 - $118,924

= $2,716,676

Now the interest on the same is

= $2,716,676 × 8% × 6 months ÷ 12 months

= $108,667.04

Now the interest expense is

= $108,667.04 + $118,924

= $227,591.04