Question

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $180,181, priced to yield 10%. Using the straight-line method, what is the amount of interest expense that Willette will report for the six months ended June 30, Year 1?

Answer 1

Answer:

$10,191

Explanation:

Calculation for the amount of interest expense that Willette will report for the six months ended June 30, Year 1

First step is to calculate the Semiannual interest payment using this formula

Semiannual interest payment = Face amount × (Rate ÷ 2)

Let plug in the formula

Semiannual interest payment = $240,000 × (6% ÷ 2)

Semiannual interest payment= $7,200

Second step is to calculate the Allocation of discount using this formula

Allocation of discount = (Face value of bonds − Issue price) ÷ Number of interest payments

Let plug in the formula

Allocation of discount = ($240,000 - $180,181) ÷ (10 years × 2 payments per year)

Allocation of discount = $59,819 ÷ 20

Allocation of discount = $2,991

Now let calculate the Interest expense using this formula

Interest expense = Interest payment + Allocation of discount

Let plug in the formula

Interest expense = $7,200 + $2,991

Interest expense = $10,191

Therefore the amount of interest expense that Willette will report for the six months ended June 30, Year 1 will be $10,191