Question

On January 1, Anthony Corporation issued $1,000,000, 13%, 5-year bonds. The bonds sold for $1,100,596. This price resulted in an effective interest rate of 14% on the bonds. Interest is payable annually on January 1. Use the effective-interest method to determine the amount of interest expense for the first year.

Answer 1

By using the effective interest method , the amount of interest expense for the first year would be $154,083.

Step-by-step explanation:

Effective interest method is just another accounting practice which is used to takeout either interest rate or amount of interest expenses( as it is in this case) , when a bond is sold at a discount or premium ( as it is in this case ).

In the question it is give that bond is sold at premium as the face value was $1,000,000 but sold at premium of $1,100,596 with coupon rate of 5%.

Formula we used to take out effect effective interest rate =

Amount of interest expense / bond sold at premium

But here we are not given interest expense but instead effective interest rate is given to us, so

14% = amount of interest expense / $1,100,596

Amount of interest expense = $1,100,596 x 14%

= $154,083.44

= $154,083 (approximately)