Question

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. Rounding all calculations to nearest whole dollar, what is the interest expense for the six-month period ending June 30, 2016?

a. $24,000.
b. $24,789.
c. $20,000.
d. $20,658.

Answer 1

d. $20,658.

Step-by-step explanation:

The computation of the interest expense for the six months is shown below:

= Issue price × market rate of interest × number of months ÷ (total number of months in a year)

= $413,153 × 10% × (6 months ÷ 12 months)

= 20658

The six months is computed from On January 1, 2016 to June 30, 2016

We simply apply the formula so that the accurate value can come.