Question

Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds

Answer 1

Answer: 12%

Explanation:

Stated interest rate is used in the calculation of the annual interest payment.

Interest payment = Face value of bonds * Stated interest rate

Annual Interest payment = Semi annual interest payment * 2

= 12,000 * 2

= $24,000

24,000 = 200,000 * Stated interest

Stated interest = 24,000 / 200,000

= 0.12

= 12%